This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

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.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $123.25 -0.80%
FB $83.30 0.35%
GOOG $548.34 -1.23%
TSLA $185.00 -2.84%
YHOO $45.10 1.42%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs