Bubble Trouble? Not Now
NEW YORK (TheStreet) -- Are stocks in a bubble inflated by Federal Reserve funny money? No.
Do headlines and many investors think they are? Yes! And that's a great sign this bull market has room to run.
It probably seems weird to say rising stocks plus dour investors means no bubble. To many, the mismatch means stocks have strayed too far from expectations and must return to earth. However, true bubbles happen when sentiment -- investors' expectations -- is sky-high. As Sir John Templeton once said: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."
Bubbles pop -- and bear markets begin -- when euphoric investors don't notice deteriorating fundamentals. In late 1999 and early 2000, for example, investors cheered scores of new dot-com initial public offerings, claiming their unprofitable business models didn't matter. Clicks ruled.Meanwhile, the U.S. Leading Economic Index (LEI) was falling, signaling a coming recession -- bad news for all those unprofitable tech firms -- but investors bid stocks higher and higher, paying a huge premium for future earnings that never came. What followed was one of the biggest bear markets in history. Today, we have the opposite. Investors are near-universally skeptical, fretting many of the long-running sore spots they've grappled with since the last bear ended including Fed policy, budget bickering and a slow economic recovery. As a result, most don't notice the fundamental economic strength around them. It's true the recovery as measured by headline GDP is one of the slowest in modern history. But slow growth is largely a function of falling government spending. Public spending and investment have detracted from headline growth in 12 of this expansion's 16 quarters. Private-sector components have done much better. Business investment alone has more than compensated for public-sector cuts. Folks just can't see it because the headline figures are so muted. Fundamental strength is evident worldwide, too. Global growth is accelerating. The UK has sped up since the Bank of England ended quantitative easing (QE) last November. Despite a modest, gradual reduction in the BOE's balance sheet, GDP accelerated sequentially in the first and second quarters while the purchasing managers indexes (PMI) for services, manufacturing and construction point to continued growth in the third quarter.
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