Bubblicious?

Recently it seems as though I haven’t been able to turn on TV, read a book, or have a social conversation about investing without the subject of “Bubbles” coming up. The argument usually goes as such, “The Federal Reserve has been propping up markets with their massive stimulus since 2008, and when that stops the market is going to crash.”

This isn’t just a recent discussion as there have been some market “experts”  and newsletter writers who have been calling the stock market a bubble for the past 5 years.  I just hope those individuals are only managing their own money and not that of others, as they would have subsequently missed out on the stock market rally we have enjoyed since 2009.

This general lack of conviction in the fundamentals of this market rally has also been reflected in a recent Gallup Poll article I read entitled “Despite High Stock Prices, Half in U.S. Wary of Investing”. The basic question asked of those polled was, “If you had a thousand dollars to spend, do you think investing in the stock market would be a good or bad idea?”  If you take a glance at the chart below you will notice that the highest percentage of those that answered “Good Idea” did so in 2000, just as the stock markets in the US were peaking during the dot com bubble.  Recently, the highest percentage of those that answered  “Good Idea” did so in 2007-again just as the markets peaked!  Definitely not a contrarian indicator!!!

So what is the current opinion of the Gallup survey group?  Only 46% of those surveyed in the latest poll think it would be a “Good Idea” to invest $1,000 in the stock market.   So relating this mind-set to the bubble fears discussed earlier ,“bubbles” normally occur when the consensus believe it’s a can’t lose proposition to do something.  We all remember in 1999-2000 hearing the tales of the hot dot com stock that doubled or tripled in less than a year, or what a great investment it was to take out a home equity loan and buy another house to flip in 2005. Currently with 50% of those surveyed saying that they believe it is a “Bad Idea” to invest $1,000 in the stock market, that old adage “ bull markets climb a wall of worry” comes to mind.  Can a bubble in stocks exist when, according to this poll, 50% of the public are still climbing the wall of worry?

Looking back at the huge market moves of 2012 and 2013 the fact that the S&P 500 was “only” up 1.81% for the first quarter of 2014 can be viewed as healthy. It would not surprise us for the market to churn around these levels for some time as we digest the gains from the previous two years. The fact that the market has been able to maintain these levels given the Fed Tapering, the concerns about Russia and the Ukraine, and weaker economic data mainly driven by weather,  should be viewed as a positive.

Until next time, let me go on the record that I think there is a bubble out there; a bubble in trying to identify the next bubble!

—Brett C. Hixon, CFP®

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