5 Reasons the Market is Not a Bubble

A Google search for “stock market bubble” is cluttered with so-called pundits calling for the end of the bull market. What is interesting is that the same talking heads have been preaching the bubble-talk for months and even years as stocks hit new all-time highs.

Perma-bears will never make money in the stock market over the long-term and below are five reasons why they should shut their yapping mouths about a possible stock market bubble.

History

An argument that is often voiced by the bears is that the market will be down in 2014 because it had such a large gain in 2013. That may be enough to convince many investors, but in reality it is flat out untrue. Since 1947, the S&P has average a 31 percent gain during its ten best performing years. Last year the index was up 30 percent, right in-line with a top-performing year.

In the year that followed the top ten years, the S&P 500 was up an average of 14 percent. If 2014 were to follow the average it would put the index at 2106, well above where the S&P 500 is today.

Retail Investor

This is yet another argument that the bears will say falls in their favor, but again they are simply lying to investors. A Gallup Poll shows that only 52 percent of U.S. adults were in the stock market last year. This is not only the lowest level in 15 years, but it is also well below the over 60 percent readings that occurred when the markets entered into new bear markets.

Since the start of 2008, mutual funds that invest in domestic stocks have seen outflows in 52 of the 72 months, according to Investment Company Institute. Net inflows into the category totaled $18.4 billion, versus $259 billion in 2000, when the Internet bubble burst. Unfortunately the retail investor is still on the sidelines and until they rush into the market a bubble will not occur.

Corporate Profits

When an investor buys into a stock they are essentially buying into the money the company makes and is expected to generate in the future. With corporate profits at an all-time high it could be an indication of a bubble to the bears, but in reality it shows the strength of the corporate economy. In 2013, when the naysayers were bashing corporations, the earnings for the S&P 500 rose an impressive 11 percent.

During the fourth quarter of 2013, the earnings for the S&P 500 grew by approximately 8.5 percent. This despite what the bears were calling an “ugly” holiday season.

Valuations

When analyzing individual stocks, sector, or the entire market it is clear the valuations are not as attractive as they were a few years ago. That being said, the market is nowhere near a level that is associated with a bubble. Based on an earnings estimate of $120 for the S&P 500 in 2014 it gives the index a P/E ratio of 15.5. The current forward P/E ratio is below the 15-year average of 16.0 and slightly above the average going back to the 1870’s.

The most important aspect of the number is that it is well below the mid-20 levels that have been associated with major bubbles in the stock market. The average estimate on the street is for earnings to grow by another 9 percent in 2014, leaving plenty of room on the upside for stocks.

Best Game in Town

Here is a list of options for investors. First, a savings account that pays an interest rate that makes digging a hole in the back yard attractive. Second, loaning money to the government via a Treasury bond for 10 years at an interest rate of only 2.76 percent. Third, invest in gold and precious metals that have been in a downtrend for two years. Or, look to the stock market that is trading below its average valuation and is growing earnings?

Investors are smart enough to determine the correct answer to the question and realize the bubble talk makes for great TV, but in reality the numbers are not there to prove we should be worried.