Two articles in the last two days, one on Bloomberg, the other on the Wall Street Journal, provided key reasons we should not worry about stock market bubbles.
- It’s only 1997 (P/E valuations have not exceeded the dot-com bubble in 2000 yet)
- It’s different this time (always a classic argument)
It’s Only 1997
Bloomberg explains In Dot-Com Bubble Time, It’s Still Only 1997 for U.S. Equities.
“Terrified that rallies in Facebook Inc., Amazon.com Inc. and Google portend a millennial catastrophe along the lines of the dot-com bust? Relax. Going by one doomsday clock, it’s only 1997 in bubble years … when there was still 2 1/2 years and 60 percent to go in what became the longest bull market on record.”
It’s Different This Time
The Wall Street Journal says This Time Is Different: Two Reasons Not to Be Alarmed by the Nasdaq Record.
The Nasdaq Composite crossed the 6000 mark on Tuesday morning, setting another record in a year that is already a hot one for the index, and further putting the old dot-com days in the rear-view mirror. But there are at least two notable old records it has not yet surpassed. One is a measure of how far the index still has to go, the other is a mark nobody really wants to see again.
1. Inflation-adjusted Nasdaq. Adjusted for inflation, the Nasdaq Composite still has not broken its record high, fully 17 years after that peak, according to data from the Journal’s Market Data Group.
2. Price-to-earnings ratio. The dot-com boom was such a spectacular feeding frenzy that by one measure of valuation, the Nasdaq Composite is not even at 40% of its peak.
The companies in the index collectively traded at 27.5 times their last 12 months of earnings, according to Thomson DataStream.
Don’t Worry, You Are Only Here.
Shiller P/E Ratio
Base image: Shiller PE Ratio
While waiting for that final 20% (and why should it stop there?) relax. Repeat after me: It’s not bubbly, it’s Bubblicious. Enjoy the ride.
Besides, there cannot be a bubble because, as we all know, it’s different this time. Honest!
Inquiring minds may also wish to consider Reader Asks: Can the Bubbles Last Forever?
Mike “Mish” Shedlock
It’s not different this time,,,the indices rise 80% of the time.
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The Fed has their back and probably owns a load of stocks from 6 years ago. As long as the corporations can fudge their earnings with Non-Gaap accounting and stock buybacks, then the party will continue.
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The party will continue, what with ETF’s of ETF’s,,, like,,,,Derivatives have gone full retail now 😉
Everybody can run his own personal hedge fund these days. Financial Engineering knows no limits, at least for now.
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Fed balance sheet is public record. They do not own any stocks. Legally they are not allowed to.
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https://seekingalpha.com/article/3980652-fed-buying-stocks
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Need to register… On another note I now know your real name… Christopher C. Finkley – so how was your flight from Detroit? 🙂
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what’s your problem and your point?
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– Dow’s gonna notch 30,000 with ease.
– Gold will still be $1100-1200
– Driverless cars already obsolete…here come the flying vehicles,
“Imagine if there’s a dozen ports or buildings,” he said. “You’ll fly from New Jersey to a rooftop on 5th (Avenue) and there will be an autonomous car waiting to take you to your final destination. It’s new routing capability for humans.”
http://www.zerohedge.com/news/2017-04-27/no-roads-needed-google-backed-flying-cars-sale-end-2017
When will the idiocy (all of the above) end? WTFK’s
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10 year bond rate was 6% in 2000 versus 2% today. People are willing to accept much lower returns in stocks now.
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It is different this time.
The economy is growing at barely 2%.
It was growing at 4.50%+ throughout the 1997-99 period.
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Forget 1997 … how about 2007 (and early 2008?
(on another blog) I remember dueling with countless bullz who were certain “its different this time.
Just as I suspected when TSHTF (finally) they – almost to the very last poster – disappeared overnight (or changed usernames) though many had been very regular posters … for years.
It will be the same here.
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The 2007 peak in the s&p 500 was about 1525. It’s now 2388.
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People are apparently even stupider now than they were 10 years ago.
Not all that surprising.
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Stupider and wealthier.
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They THINK they are wealthier.
Paper gains….
You haven’t made a nickel until you SELL.
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So if I buy a stock at 100 and it goes to 200 I did not get wealthier. But if I sell the stock at 200 and take the gain – then I did get wealthier.
What if tomorrow I buy back the same stock for 200? Or any other stock that is highly correlated with the previous one, therefore giving me the same risk profile I had just the day before.
Something illogical here.
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“You haven’t made a nickel until you SELL.”
…
Shamrock will go down with the ship … just like all of retail will.
I’ve had several good honest discussions with friends who are well invested in the market. Talked of crashes and such. No difference to them. Their capital gains is so much … and not knowing when to get out (or get back in) they will just ride it out.
I’ve very worried about the growth of the ETF market … and what might happen in a downturn. Many/most of these ETFs use derivatives to mimic an index rather than holding the actual underlying securities of an index. I bet most investors have not a clue what an ETF disclosure statement says … they probably think an ETF that tracks the S&P actually contains (weighted) stocks of the S&P. They will be in for a rude surprise when liquidity dries up.
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I will be bullish until at least 2020 or until an alternative to the dollar is hatched. What’s the alternatives for big money? The US is hopefully going to be lowering taxes, while govts in the rest of the world are raising taxes.
It is different this time. When was the last time that stocks where the safe haven instead of govt bonds?
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1929? 1987? 2000? 2007? 2017?
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How much capital was exiting Europe, China, and other distressed areas in 97, 00, and 08? Was the euro and EU imploding back then, or was their hope the euro would be competition for the dollar? It is different than 97, 00, and 08, but not that different from the 20’s and other periods throughout history when distressed capital flowed from the periphery to the core ($US). History does repeat if you pick the right cycle period.
As someone that was skeptical of this bull market after 08, and followed fundys and technicals, I’m not saying this market is easy. What I am saying is emotions must be checked at the door, and simply follow the (big) money in the context of history (further back than 1970).
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I’m not going to argue that valuations aren’t high. They are and the more you pay for equities the less you should expect future returns to be. But there are important differences between today and the dot.com era primarily that during the dot.com investors were bidding up the shares of companies that had no earnings. This is not inconsequential.
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If one is a Perma Bull, then the last several years were great, OTOH if one is a
Perma Bear, then the last several years have been painful.
The problem with being a Perma Bear is that stocks are never quite cheap enough for those poor souls to buy.
We also have those that only trust precious metals. There were a lot of them around a few years ago. Most of them seem to have vanished.
I think the best approach to investing is Growth At A Reasonable Price. Stocks like Google and Starbucks etc. They make people a lot of money. Plus they are fun to own over the long haul.
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That’s funny – do you realize that the author of this site is a metal loving perma-bear?
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Hello Mish, are you watching the draft tonight?
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It’s different this time: this monster truck is running with no safety equipment and no seat belts.
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How can global economic analysis include bubbles while ignoring a massive military build to squash an eccentric Asian who would rather flatten his country and lose his behind to save his face. I suppose North Korea contributes nil to global economics. They haven’t shipped coal for a month.
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Have you seen that JPG image showing the world at night? Cities all over the world lit up so bright they can be seen from space? North Korea is dark — Africa has more lights.
China isn’t going to allow USA/South Korea to be on their border, and they don’t want an immigration crisis from millions of North Koreans streaming into China. South Korea / Japan (and US) isn’t going to allow a crazy bowling ball to point nuclear weapons at them; and Russia would rather sell oil and natgas to China without trying to go around a war zone.
Kim used to be an asset to China, now he is a liability. Trump will make lots of noise, and tie China’s export aspirations to keeping North Korea under wraps… but ultimately China will make sure North Korea is run by someone more to their liking.
I have to wonder if the Chinese aren’t already interviewing various North Korean generals to run the country after Kim has an unfortunate accident.
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What does “the market” look like after you strip out FANG, Apple and Tesla? Those stocks seem to be the closest things to dot-com stocks: several lack any earnings, their “business” model is a joke, and their stocks are priced at P/Es that assume levitating per[etual motion machines.
Facebok is the new AOL, it owns no content and the “cool kids” are starting to shift into hula hoops or pet rocks already. Censoring news stories to suit San Francisco infants will have little appeal outside California.
Amazon is still selling things at a loss, as though they were an upstart company. Every time you think they might make some profits, Bezos goes and starts yet another money losing venture — like those companies that constantly acquire to conceal the slow death of what they bought last year. AWS faces competition from MSFT and Google. And how are Amazon’s brick and mortar stores different from Costco, Walmart/Sams, etc? (except that Costco and Walmart have first come advantages). All those tiny, mom and pop, Korean groceries in New York City / Boston / San Fran have lots to fear from Amazon prime. But in more affordable places to live… Costco and Walmart have massive advantages
Then there is Tesla… Tesla is just a ponzi scheme that is starting to collapse without regular injections of taxpayer subsidies.
Apple, Netflix and Google all look like decent companies with good business models… but its difficult to imagine any of them hitting a new product big enough to move a needle their size. Tim Cook is no Steve Jobs when it comes to creating new products. These three are solid companies with established business models — and should all have regular P/E multiples.
After stripping out these high flyers, what does the rest of the stock market look like? The lemmings are all being herded into big index ETFs — SP500 or Dow or the like. But the stock market is made up of hundreds of companies, some of which are peaking (FANGs), some are nothing but hot air (Tesla), and some of which are troughing…
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“Amazon is still selling things at a loss, as though they were an upstart company. Every time you think they might make some profits, Bezos goes and starts yet another money losing venture — like those companies that constantly acquire to conceal the slow death of what they bought last year.”
……
People (and short sellers) have been beating up on Amazon since the 1990’s. It is the most relevant e-commerce and web services company in the world. It’s on it’s way this year to generating $20 billion in operating cash flow. How many companies are growing revenue Y/Y at 25% right now ?
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revenue is growing, profits not
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The argument that I’ve heard against following the Schiller PE today is that it still includes the ’07 to ’09 earnings cliff. In a couple of years the earnings cliff will get removed from the Schiller PE. I’ve wondered what a 5 or 7 year PE chart would look like.
Care to comment, MISH?
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Despite empty promises from incompetent central bankers… the business cycle has not been repealed.
Data from ’07-08 should be included unless you are still under the central banker’s delusions.
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Manias always portend sub par future return, but no one knows how long they will last. Bankers have been attempting to centrally plan the Nikkei for decades now. The Nikkei has had regular 50% bear markets, but never a return to market pricing. Data mining 20th century US free market data is not likely to predict the duration of this bank centrally planned experiment.
During the 20th century, a 4% S&P dividend yield was the norm, and 6% dividend yield usually meant a bull market in the future. Bankers seem to prefer subsidizing a 1 to 2% dividend yield, if the Nikkei is any guide. A return to 4 to 6% would put domestic bank margin loans and bank written derivatives at risk. In Japan, it was corporate loans for purchasing stocks of other companies that were at risk from a return to free market pricing.
After the Y2K Nasdaq mania started to deleverage, bankers immediately printed the housing mania to prevent a return to 20th century norms. When the housing mania started to deleverage bankers immediately printed QE to prevent a return to 20th century norms. Serial mania has become the new normal for stocks. Who knows if free market S&P pricing will occur at all during the 21st century.
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Yes, it looks like we are in the midst of a central bank driven market pricing era. Will we be able to break free of this interventionist market remains to be seen. As of now the Fed appears to have come out on top.
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Why limit ourselves? Let’s put some of Robert Schuller’s old fahioned ‘Possibility Thinking’ paradigm to work.
Forget self-driving cars. Go straight to self-flying cars. Look at all the air traffic controller jobs it would create! A 100 mile daily commute to work each day would be a walk in the park. Those who liked their cars could keep their cars. Freeway congestion would be eliminated. Commerce would get a huge shot in the arm.
150,000 DOW here we come!!!!!!
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I saw the EWI supercycle chart and it projects DOW 40000 in a few years, but the rub is we have to go through DOW 5000 to get there! Bob Prechter has left a lot of investors high and dry over the years, it would be something if he could come through on that one. (sell here for 5000 and buy at the lows for 40000, if you could time the move,your good)
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Who could have predicted that bubble will reach the proportion it did in 2000 in 1997? Who could have predicted it will burst in Mar/Apr 2000? No one. It could have well burst in 2004.
Thus we do not know when this will burst? But burst it will. Till then make hay while the market shines! The bigger questions are:
Will the burst be bigger than 1929 or 2000 or 2007?
Will it create a Lehman moment?
Will it bring down the financial system?
Will the central bankers allow it? If not, can they stop it?
Will the central bankers do a QE4EVER?
Will everything be bought up by the central bankers?
Like not buying when market goes up, it is going to be difficult not to sell when market goes down despite BTFD.
This blowout seems set to get interesting.
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It’s quite likely that the balloon will pop during Trump’s 1st term. If it’s going to happen the globalists would much prefer for it to happen on his watch. Then they’re assured of another puppet moving into the White House in 2021.
They will preempt all the networks for a special appearance by The Donald after the “pop” is heard around the world.
In summary his speech will say: “I’ve put Making America Great Again on hold indefinitely while we all try to find our next meal. With that….God bless each of you and God bless America. Good luck:”
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There is still disagreement whether the stock market is in a bubble, or merely on average slightly overpriced. The very serious bubble is in government financing.
Assuming there is a bubble in government financing (and perhaps in stocks)… the bubble might “pop” suddenly, or if history is any guide it might just “hiss” and deflate over a long period.
As the government bubble just hisses and deflates, certain entities that are dependent on government largess (the college indoctrination system, public unions, etc) are likely to have sudden “pops”. Education and wisdom are priceless, but a college degree is not necessarily education or wisdom. Colleges will close at an accelerating pace, but people will continue to be educated one way or another. Maybe we will see a resurgence of apprenticeship in blue collar work and internships that are more than fetching coffee in white collar jobs….
I think we are in for at least 8yrs of “hissing” (slow deflation). I seriously doubt the losers at the Fed “allowed” 2008 to happen by choice — they were powerless to do anything about it
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Slow BUBBLE deflation, but continued monetary inflation higher than CPI suggests (higher than CPI is not the same as hyperinflation, just to avoid more hysteria… it means total cost of living will continue to increase at a steady 4-5% yoy).
The bubble goes away with a 10-20 year hiss…
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Relax, don’t worry. CNBC says everything is good so it must be true.
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Historically its an interesting comparison
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“Terrified that rallies in Facebook Inc., Amazon.com Inc. and Google portend a millennial catastrophe along the lines of the dot-com bust? Relax. Going by one doomsday clock, it’s only 1997 in bubble years”
What is there to relax about? The Great Depression that followed the 1929 bust, was not a time of great joy.
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I can’t tell if this is completely sarcastic or absolutely serious. Either way, I’m selling.
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