You know the stock market is really going strong when the "bubble" talk starts - and it officially has. The financial media is buzzing with a very impressive array of "bubble-related" topics. Because I know that you are eagerly anticipating my words of wisdom on the topic, here's my short answer: This bubble talk is nonsense. For the longer answer, keep reading.
Let's talk first about what a stock market "bubble" is. Over the long-term, the stock market tends to follow the ups and downs of the economy and corporate profits. A bubble comes around when the stock market rises much more than is justified by the economy and profits.
To make the point more clearly, it's time for the next installment of "Brad's Brilliant Metaphors": Think of the stock market as a boat, and the economy as the tide. Typically, as the tide goes up, the boat goes up, and vice-versa. However, when there's a bubble, the boat is floating in the air - precariously waiting to crash back down to the sea. Once you remember that the "boat" represents the stock market, you can see why a bubble is so worrisome.
Looking at the markets today, is the boat far above the tide? The obvious answer is yes. The S&P 500 is up approximately 125% since March of 2009. It's up nearly 17% over just the last six months. Clearly, the boat is rising quickly - which means the stock market is booming. But that is where it gets tricky. Where's our corresponding economic boom? At best, our economy could be called "solid." The logical conclusion is that we clearly are in the midst of a bubble.
But, let's look at it another way. Since September of 2007, which was just before the financial crisis, the S&P 500 is only up about 7%. That works out to just more than 1% per year. Where's the bubble there? Let's go back even further, to March of 2000. Over that thirteen-year time period, the S&P 500 gained less than 9%. That's a pathetic 0.7% per year. When you look at it from this perspective, it's clear that this is not a bubble - this is what it looks like to finally crawl out of a hole.
If you still aren't convinced, consider this: According to CNBC.com, since the year 2000, corporate profits and dividends have doubled. Remember, over the same time period, the S&P 500 gained less than 9%.
Going back to our metaphor, you can start to see what's really happening here. While it's true that the recent stock market performance hasn't matched up with the economy, it's because the stock market "boat" has been underwater for years. It's just finally reaching the surface.
However, just because there isn't a bubble, that doesn't mean the markets are going to keep going up. The future of the markets from here will depend on what happens with the economic "tide." My crystal ball says that we'll continue to slowly improve. However, it's also pretty easy to argue for an economic slowdown. One thing is for sure, if the markets do crash from here, it won't be because of a bubble.
Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at email@example.com