From the Mailbag: The Bubble That Wasn’t
A Note From the Editorial Director:
The market seems to have stabilized after a scary January. So we thought we were done for a while with fears about a "bubble." No such luck. The comment below, which came in for Marc through our new website, is typical. (For a tour of everything the new site offers, click here.)
Add to this discussion by using the comment link below, or feel free to send us a question of your own via firstname.lastname@example.org.
- Andrew Snyder
Recently I've been getting nervous about a potential market bubble. So I started researching the issue, and found helpful articles from you and from Alex Green on the subject. You both argued persuasively that this market is not in a bubble.
But I noticed something else, too: Both of your articles were from last November, and since then the market is up another 4.25%, and my small-cap stocks are up even more. I'm thinking: Something's got to give here, right? What do you say now?
Here we go again. The "B" word.
Ed, you're right that stocks have been on a hell of a run. The bull market is now 5 years old, during which time the Nasdaq Composite Index has soared 245%.
I'm not going to argue that the market is undervalued. It's not.
The Nasdaq has a price-to-earnings (P/E) ratio of 31. Going back to 1995, that's above its historical average of 20, but below the 35 P/E at the October 2007 peak.
While stocks may not be screaming bargains, it's irresponsible to say they're in a bubble.
Let's look back at the last few bubbles and see if the times are similar.
During the late 1990s, stocks soared. So much so that people quit their jobs to trade stocks. Good jobs, like doctors and lawyers. Cab drivers offered stock tips. People routinely said investing in the market was the only way to make money and that the market doesn't go down. If it does, they hedged, it doesn't go down for long.
Companies that had nothing to do with technology added ".com" to their names in order to get more investor interest.
The stock market became America's national pastime. CNBC was as popular as ESPN. Financial media personalities like Maria Bartiromo became stars, appearing on David Letterman and other mainstream shows.
And the P/E of the Nasdaq was an outrageous 177. Of course, there were plenty of companies with absurd valuations that didn't even make money.
Real Estate Bubble
In the mid-2000s, housing prices took off, doubling in many markets in just a couple of years. So much so that, again, people quit their jobs to flip houses. People routinely claimed investing in real estate was the only way to make money. After all, "they're not making any more of it," they said smugly.
Real estate and house flipping became America's pastime. Blue collar workers were living in $800,000 homes after flipping and upgrading. It also helped that lenders were pushing zero-down payment, no-documents-required, interest-only loans. That's like allowing someone to buy stock on margin where they only had to pay the margin interest, without having the funds to back it up. What could possibly go wrong?
The market today isn't cheap. Some might even argue it's getting expensive. But we're hardly experiencing the frenzy of the previous two bubbles.
CNBC's ratings have only recently begun to rise after being in the toilet for months.
And last time I looked, Biz Markie hasn't been on TV pushing small cap stocks like Isis Pharmaceuticals (Nasdaq: ISIS).
In this black-and-white world where you're either a Marxist or a neocon, rich or poor, a Yankees fan or a Yankees hater, there appears to be little room for nuance. If the market isn't cheap and stocks have been rising for a while, then clearly it must be in a bubble.
The next time you hear someone mention the bubble word, remember the last few bubbles. Stocks are up and have been for a while. But the higher prices are not accompanied by a greed-fueled frenzy.
When cabbies start talking about stocks again... when others outside the media industry notice that a high profile business news personality switches networks... and when people start quitting their jobs to trade stocks... that's when it will be a bubble.
I haven't had a cab driver talk to me about stocks in 14 years, and not one person that I know switched to Fox Business because Maria Bartiromo moved there from CNBC. And people are still trying to get jobs, not quit them to trade stocks.
P.S. If you're on Twitter, you can follow me @stocksnboxing for observations about the market during the trading day.