|8/14/2014 7:00:00 PM|
Is this a bubble?
By Brad BlackburnAs someone who frequents all kinds of financial media all the time, I see my share of financial headlines. My official, highly unscientific research study unequivocally supports the following conclusion: We've never had more headlines screaming about a stock market bubble. If those headlines are correct, and this really is a bubble about to catastrophically burst, it's not like any other bubble we've seen. Almost by definition, when the headlines are screaming BUBBLE, and everyone agrees - it's not a bubble.
Remember in the late 90's when internet stocks couldn't lose, and people quit their jobs to become day-traders? It was supposedly a new world, where it made sense for internet stocks that never had a single penny of profits to be worth billions of dollars. That is what a bubble looks like.
Remember back in 2005 and 2006 when real estate couldn't lose, and people quit their jobs to flip houses? It was supposedly a new world, where new exotic financial instruments allowed huge amounts of debt like never before. That is what a bubble looks like.
A bubble is when people are so greedy, they lose sight of risk. That's not what's happening in today's world. Businesses are still too scared to spend their enormous piles of cash, and huge swaths of the general public still shun stocks. Believe me, when I'm talking to my clients, none of them are begging me for the riskiest investments out there. The conversation is almost always about how to control risk. That is not a bubble.
So, if it's not a bubble, what is it? The less "headline worthy" description would be that stocks are merely "overvalued." Maybe by just a little, or maybe by more... However, just because stocks are overvalued, doesn't mean they must drop from here. When people talk about a bubble, or stocks being overvalued, they are talking about paying a high stock price relative to the earnings of a company. That's the key ratio - the price you are paying for your slice of earnings. If that ratio is out of whack, there are two ways to fix it, the price of the stock can come down (which is what we worry about), or the earnings can come up.
My theory is that the great run in the markets over the last year-and-a-half was due to the markets forecasting an improving economy, and improved earnings for stocks. In other words, the markets expect the earnings side of things to improve. That's not a bubble; that's what the stock market does. Of course, if the earnings don't improve, the markets will probably fall - maybe a lot.
But that's a completely different thing than a bubble - so stop calling it that.
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
Article Comment Submission Form