Streetwise

Lauren Rudd

Sunday, May 11, 2014

There Is No Stock Market Bubble

The epitome of my consternation of late is the seemingly never ending querying as to whether we are in the midst of another Wall Street bubble. A recent article in the New York Times was titled, “Time to Worry About Stock Market Bubbles.”

The theme was that while the rest of economy has been growing slowly for almost five years, stock prices have been accelerating upward at an unsustainable pace. An investment in the Standard & Poor 500-stock index would have doubled from early 2009 through early 2013 and then gained an additional 18 percent in the remaining 12 months.

Robert Shiller, a Nobel laureate in economics pointed out that when compared to long-term corporate earnings, there have only been three periods during the past century when stocks have been more expensive than they are today, the 1920s, the late 1990s, and in the prelude to the 2007 financial crisis.

However, Shiller also pointed out that relative to corporate earnings over the previous 10 years, the Standard & Poor’s 500-stock index remains less expensive today than over much of the past 15 years.

In her testimony before Congress on May 7, Fed Chair Janet Yellen pointed out that she did not have concerns that the Fed's policies could be fueling bubbles or other threats to financial stability. She said, “While there is some evidence of investors reaching for yield, it has not gotten out of hand.” She went on to say, "valuations for the equity market as a whole...remain within historical norms..."

Want it in simpler terms – every time there is a strong market rally the Chicken Little syndrome sets in with financial Paul Reveres shouting, the correction is coming, the correction is coming. The fear of impending doom is simply a promulgation of indefensible assumptions based on questionable data.

Regardless of the veracity of a rising stock market, having a combination of patience and fortitude when you invest remains a necessity. In other words, you must be comfortable with a 3-5 year investment horizon. And while there is always opportunity for profit in any market scenario, you need to let caution be your guide.

Savvy investors have learned that financial prophets do not exist. If you utilize the recommendations of prognosticators who appear in print or on television, remember they are not going to keep you abreast of current developments...or tell you when they are selling.

To profit in any investment climate you must remain calm in your outlook and diligent in your research. There are no sure and easy paths to riches on Wall Street or Main Street. And while not a Holy Grail time will usually work to your advantage meaning that the longer your investment horizon, the greater will be your potential for increased rewards.

Yet, one major investment house was given to state that it is delusional to assume that you can expect to increase your wealth by investing long term in the stock market. Such comments are often followed by the statement of the late world famous economist John Maynard Keynes who said, “In the long run we are all dead.”

Thanks to the First Amendment you can, without recrimination, go off half-cocked blathering prose that is tantamount to carrying a sign saying, “Repent now, the world is coming to an end,” or worse be blatantly, if not willfully, wrong in your comments to those who trust your expertise.

This was clearly evident in some past comments by Niall Ferguson, the distinguished historian whose brand of conservative punditry colors his rhetoric on historic events.

Ferguson once commented that John Maynard Keynes’ famous long run statement stemmed from the fact that he was gay, had no intention of having children and was thus blinded to the importance of long-run considerations.