On my last blog I commented that a climbing interest rate may affect our wallets, but several are believing the low interest rate is what has kept our stock prices high and the threat of a rising interest rate is causing people to become too nervous to invest into them. Maybe, that answers the question of why is Trump saying the stock market is in a big, fat, ugly bubble.
It seems bubble talk is bubbling up on the presidential campaign trail. Nobody on Wall Street disputes that the stock market is pricey by historic standards. But are stocks — juiced by the Federal Reserve’s low interest rate policy — in a “big, fat, ugly bubble” that will end badly as Donald Trump warned at the first presidential debate?
Trump, the Republican nominee, isn’t the first person to warn of a bubble. Nor is he the first to cite super-loose Fed policy as the root cause. Bubble talk has been circulating since last September, when billionaire investor Carl Icahn warned of “danger ahead” and told CNBC: “We’re in a bubble.” Since then, other heavyweights, including real estate titan Sam Zell, bond king Jeffrey Gundlach of DoubleLine Capital and former hedge fund titan Stanley Druckenmiller, have warned that many investments have been massively distorted by Fed intervention and that financial pain will ensue once the bubble has popped. He feels we need to stay away from the stocks and invest in gold. The government keeps saying we have a good economy and it can stand to have our interest rate to climb. They plan on discussing it again in December.
Other Wall Street pros who say the typical ingredients of a bubble are absent. They feel that stock values, while elevated, have not reached nosebleed levels, They also feel irrational exuberance is missing.
“No, the market is not in a big bubble,” says Michael Farr, CEO of money management firm Farr Miller & Washington. “It’s expensive, but it’s not wildly speculative.”
The Standard & Poor’s 500 stock index’s current price-to-earnings ratio (P-E) — a common metric used to determine if the market is cheap or frothy — is far from bubble territory. The trailing four-quarter P-E on adjusted earnings is 18.7. While that’s above the long-term average of 15 to 16 times earnings, it’s well below the P-E of nearly 30 at the peak of the dot-com stock bubble in 2000.
What’s also missing is a stock-crazed nation where taxi drivers turn into day traders in hopes of making a fast buck in stocks.
“I don’t get the sense that everyone is ‘all in’ like they were in real estate in 2007 and tech stocks in 2000,” says Paul Nolte, senior portfolio manager at Kingsview Asset Management. “Many investors remain wary of stocks. When we read about everyone getting rich on the market and the many ‘can’t miss’ opportunities, then we’ll be in a bubble.”
That doesn’t mean stocks won’t stumble if the Fed starts hiking rates, warns Mark Luschini, chief investment strategist at Janney.
“The stock market is still vulnerable to a shakeout,” he says. “Still, absent an aggressive move higher in rates, I think the market’s negative reaction to a small lift in rates would be brief.”
It would be nice if everyone could get together and come up with a solution to the bubble problem. Myself I feel our economy is bouncing on the bubble and can’t makeup its mind where it needs to go. Most of the stocks just keep jumping around up one day down the next. I think that is why everyone is afraid to get in because so far the market can’t seem to stay up more than a day or two and then everything is back down again.