Why This Bull Market Is STILL Not a Bubble

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
bull market

Last week, the Dow, the S&P 500 and the Nasdaq hit all-time record highs on the same day, something that hasn’t happened in 17 years.

You would think this would cause the merchants of doom - those folks who persistently warn you against owning stocks - to change their tune... and perhaps even admit they were wrong.

But that’s not their style.

The official Permabear Playbook requires them to insist that they were “not wrong, just early” and to scour the headlines for every negative tidbit they can find to justify a continued gloomy outlook.

It’s an easy job. After all, the mainstream media delivers their fact set on a silver platter each day.

They can point to the weak economy, the real unemployment rate of nearly 10% (including those who have given up looking for a job), the strong dollar (which crimps U.S. exports), the lack of business investment, bad trade deals, the federal debt, political dysfunction in Washington, and a Federal Reserve that has pushed rates to zero but is now itching to take away the punch bowl.

They call equity investors - the ones who have been right for the last seven years (and seven decades) - Pollyannas, patsies and fools who are blithely sinking their hard-earned money into a Fed-induced bubble of epic proportions.

Sounds scary... until you look at the facts.

Let’s start with an inconvenient one. Most of these scaremongers have been saying the same thing not just for years, but for decades.

They sell fear for a living. Whether they are right or wrong is beside the point. The goal is to scare the pants off of you to get you to buy their end-of-the-world book, bearish newsletter, hedge fund, rare coins, precious metals, variable annuity, high-commission principal-protected investment, offshore account or short-selling service.

And since the occasional bear market is a fact of life, they know that - like a stopped clock - they will be right eventually. When that time comes, they will run the video to demonstrate how valiantly they tried to warn you... and so maybe now you should smarten up and listen.

I know investors who have fallen for this shtick for years. Many of them - surprisingly - are not angry at their permabear advisors for their lousy advice but at the economy, the stock market, the central bank - indeed, the universe itself - for not complying with their view of reality.

“Crash, dammit!” is their mantra.

Unfortunately for these depressives, the stock market is not a bubble. How can you be sure? Because every market bubble has two primary characteristics: sky-high valuations and a euphoric outlook.

Let’s start with valuations. Discount everything that someone says about how far stocks are up from the market bottom on March 9, 2009.

It is completely irrelevant that the Dow has nearly tripled since then. You cannot tell whether a market is overvalued by how far it has risen.

(Conversely, how far down a market has gone down tells you nothing about whether it is undervalued. For example, when the Nasdaq lost 25% from its peak of 5,048 on March 10, 2000, it was still not cheap - and only a third of the way to its eventual bottom in October of the following year.)

What makes the stock market overvalued or undervalued is the relationship between prices and earnings. Historically, the U.S. market has sold at an average of 16 times earnings.

Today, the S&P 500 sells for 17 times consensus estimates for the next 12 months. This is a little higher than the average, but Bubble Territory?

No way.

This doesn’t mean that the bull market will necessarily continue for the next three months... or the next three years. It only means that we are not currently experiencing lighter-than-air valuations.

Now let’s turn to sentiment. Think about the giddiness investors felt about dot-com stocks during the internet bubble in the late ‘90s. Recall the supreme confidence home flippers had during the housing bubble of a decade ago.

Now consider the stock market today. Do the people you know seem euphoric about the outlook for stocks?


You’re more likely to hear that rising share prices are disconnected from the real economy, that the central bank’s easy money policies are pushing people into riskier assets, that stocks are too expensive to even consider buying, and investors have simply taken leave of their senses.

History demonstrates that this is not the way that people talk at market tops.

So while there may be a sell-off in the near future, there won’t be any bubble popping because there is no bubble here to burst.

Moreover, there are good reasons to feel optimistic. Job growth has been better than expected. Inflation is MIA. Interest rates are at rock bottom. Energy is ultra-cheap. Earnings are set to ratchet higher. And public companies are engaging in record share buybacks at a rate of more than $30 billion a month.

So act like a serious investor. Asset allocate your portfolio. Diversify your holdings. Buy quality. And run trailing stops behind your individual stocks.

Because this market may still have plenty of positive surprises in store.

Good investing,


Have thoughts on this article? Leave a comment below.

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