Market Pulse: Bubble, bubble, toil and trouble
July 16, 2014
After the technology stock bubble in the late 1990s and the real estate bubble in the mid-2000s, analysts often see bubbles whenever prices are strong. Some say there is bubble in social media stocks while others see one in Spain's bonds.
According to the media, a "cupcake" bubble burst two weeks ago when Crumbs closed its stores. It seems there is a bubble in identifying bubbles.
With interest rates near historic lows, some analysts claim there is a bubble in Treasury bonds. Not so. Anyone who buys a Treasury and holds it to maturity will make money.
Not much money, but they are guaranteed a profit. I'm avoiding Treasurys for other reasons, but it isn't a bubble when investors make money.
Others claim there is a stock market bubble. Once again, I disagree. Just compare this period to the late 1990s. Back then it seemed everyone wanted to own stocks. Now, most everyone is nervous about the market.
Wharton Business School professor Jeremy Siegel is good at identifying stock bubbles. In March 2000, at the height of the internet stock bubble, he wrote a piece in The Wall Street Journal that warned of severe overvaluation in technology stocks, which he called a "suckers bet."
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What does he say now? He is bullish and has been throughout this bull market. Once again he points to valuation. The market's p-e ratio has moved from undervalued a few years back to its historical average now. Given the low interest rate environment today's p-e is still attractive.
Bubbles are rare and assigning that word to every security that is doing well is silly. There may well be bubbles forming in Spain's bonds or some other exotic securities, but there isn't a bubble in Treasuries or our stock market.
Of the two, I'll take stocks.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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