I am refering to a familiar refrain from the back seat for anyone who’s taken a passel of impatient kids on a long road trip. Now those kids have grown up and are asking “Is it a bubble yet.” Actually those kids are mostly talking heads and pundits in the financial media. It is a question that emanates from the sweet spot of what they do best: worry people, create uncertainty and foster bad investment outcomes! It puts butts in the seats.
‘Once burned, twice shy’
As we just navigated a major financial panic, most people are still focused squarely on the rear-view mirror and the bursting of the housing bubble. This is not unusual as past major market breaks have scarred investors so badly that they refuse to be involved again. 2008 is no exception. Yet, now that everyone is looking for the next ‘bubble’ and healthily skeptical about the market (i.e. the ‘Wall of Worry’), it would appear to be safe to be back in the water. It probably won’t happen until they stop looking. Also, a key ingredient for a speculative blow-off, animal spirits/ euphoria, is just not there. These animal spirits may exist in certain stocks, but not as a wide-spread market phenomenon.
BTW, financial panics, a la 2008 and 1929, are extreme and dangerous market events. Fortunately they are very rare. Bubbles are not. If you were invested in the NASDAQ during the March 2000 bursting of the ‘Tech Bubble’, the value of your investment would have declined by 71% at the 9/11/2001 lows and today you are still 20% plus under water. That was a bubble!
Psst! Hey kid. You wanna see a bubble? (3/24/00 below)
Here are a few interesting metrics on the S & P, circa 2000 (Tech Bubble) versus the November 1, 2013 close:
Date Close Earnings Multiple S & P yield 10 Year Tsy EYld*
03/24/00 1552.81(a) $53.47 (a) 29.04 1.16% 6.29% 3.00%
11/01/13 1761.64 $107.58(e) 16.35 (e) 1.89% 2.62% 6.10%
2014 (est) 1761.64 $121.67(e) 14.52 (e) – – 6.90%
*Earnings yield on the S&P
I point out with 2013 mostly in the bag, Standard & Poors is countenancing a $107.58 estimate on the index. For next year that number jumps up about 13% to $121.67. Even if it comes in at $114 the index would still have a 6.5% earnings yield vs. a 2.62% yield with no growth potential on 10-year treasury note. In the case of either number you would also have a dividend yield of 1.89% on top of the earnings yield. These are not bubble numbers.
The S&P 500 is up 1096 points from the 2008/ 2009 lows (a whopping 165%). It is up 13.5% from the all-time high it reached on March 24, 2000 (vs. inflation it is down). Between massive market gyrations we have been flat for thirteen and a half years! During that time the earnings have doubled and the dividend is up 63%. Investors need to focus on the long-term Bear we may be departing rather than the spike off the lows.
A word or two on ‘The Taper’
‘The dreaded taper’ will come. Rates will go up. The market may tank for a while. When it does, people fearing a recession will flock back to the ‘safety trade’ (ten-year treasuries); thus moderating any spike in rates that might occur. Remember, tapering is not tightening. Importantly, it will be a sign of a more robust economy: Good for growth, Good for earnings, Good for stocks!
Is it a bubble yet? I don’t think so!
What do you think?
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