Are we in a bubble? A few clients have asked this recently—a natural one with the major indexes reaching new highs. The short answer: we’re probably not in a bubble, but cautious investors should consider reducing their equity bets. The stock market is high because corporate profits are high, and stock prices ultimately are driven by earnings. See chart here: Chart
This week we review three articles addressing this question. Liz Ann Sonders, Chief Investment Strategist of Charles Schwab & Co, says it is premature to be calling this market a bubble. The second article, by Howard Marks of Oaktree Capital Management, says that riskier behavior is observed in the market, but he doesn’t think we have reached a danger zone yet. Finally, Jeremy Grantham of GMO expects the U.S. stock market to rise another 20% to 30% in the next year or ‘more likely’ two.
Dismiss Bubble Talk…for Now. It is premature to be calling this market a bubble, according to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co. This market has little resemblance to past market tops. “I am by no means dismissing the possibility of a market correction, especially around the beginning of Fed tapering. Historically, corrections associated with the beginning of a higher rate cycle have been generally in the 5-10% range; and it may not be that different this time round. But a normal single-digit correction is something entirely different than the end of a bull market…markets are not yet trading near past valuation peaks.”
Markets haven’t reached the danger zone yet. Howard Marks of Oaktree Capital Management believes strongly that most of the key phenomena in the investment world are inherently cyclical. “The cycles aren’t predictable as to timing or extent. However, their fluctuations can be counted on to recur…the details don’t repeat but the rhyming patterns are extremely reliable…now we’re seeing another upswing in risky behavior…it has gathered steam…but not to anywhere near the same degree as in 2006-2007…I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 or early 2009, and they are becoming more so