It seems that everywhere I go over the past few weeks, I bump into some form of bubble chatter. Mom and pop are returning to equities means it’s a bubble, all the new stock and bond issuance is a bubble and, of course, the Twitter initial public offering indicates we are deeply in bubble territory.
Russ Koesterich of Blackrock, however, points out that the usual indicia of bubbles are nowhere to be found. He points out stock valuations are “no longer cheap, but they are still a long way from the peaks seen in previous cycles.” Equities trade for 2.5x book value and for 16.5x trailing earnings — far below the heady highs of prior bubbles. He notes the 1987, 2000 and 2007 peaks saw price-to-earnings ratios at 23, 30 and 17.5. The price-to-book ratio, meanwhile, peaked at close to 5 in 2000 and 3 in 2007.
He points to accompanying chart, which uses 5-year rolling gains off of market lows. That puts the rally into context of the prior collapse. By that basis, markets are not nearly as toppy as they were in 1987 or 2000.
I am legally obligated to point out that these bubble-callers all managed to miss the bubble in dot-coms, the credit bubble and the housing bubble. That they now spot a stock market bubble should be of comfort to nervous bulls. And if U.S. equities really make you nervous, look overseas, where international stocks are 30 percent to 40 percent cheaper than U.S. stocks.
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