Source: BlackRock


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.


Originally published at Bloomberg View

Category: Contrary Indicators, Investing, Psychology

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9 Responses to “Not Quite Bubblicious Yet”

  1. Mr.-Vix-It says:

    Yes, but there is a massive bubble being blown in Silicon Valley real estate. Funny that Yellen didn’t mention that as she is quite familiar with the Bay Area. The prices on the Peninsula have reached frothy levels as all-cash buyers from China are buying at any price. Throw in some inflated stock options from various tech companies and you have buyers stretching in a big way for meager residences that are 60-80 years old. I have lived through many cycles of traffic here and the commute is without a doubt bubblicious as it now takes about an hour +/- 15 minutes (and more likely +15 minutes) to drive 15 miles during peak traffic even though people are supposedly driving less these days.

  2. BuildingCom says:

    Housing is still wrapped up in a massive bubble.

    • Certainly looks frothy

      • BuildingCom says:


        It’s the same bubble. It was never allowed to correct.

      • You cannot seriously state that a market which collapses 57% was never allowed to correct — what actually occured is the interventions prevented the final stages of that correction.

        As to housing, you are definitely correct — there never was even a below trend valuation, let alone a full crash

      • BuildingCom says:

        Yes I can and do.

        You see….. prices were never *allowed* to equilibrate and the same forces that tripled housing prices over the long term trend(and replacement costs less depreciation) were never removed and in fact where augmented by additional stimulus.

        Make no mistake about it….. there is a massive housing price correction ahead of us.

  3. rd says:

    I think many of the bubblers have assumed that any sort of over-valuation is a “bubble” because it makes for good headlines, especally as we have proven that we can have multiple bubbles in a fairly short period of time over the past 13 years.

    Too me, a bubble is a very unsustainable valuation level that will likely pop with final valuations for a significant percentage of the investments dropping to 10% to 20% of the original value with little prospect of recovering the value in the near future. Even housing in the mid-2000s fits this if one looks at the two key components separately: homeowner equity and subprime mortgage debt – each of these got thoroughly trashed in 2008-2010 and are still well below peak valuations.

    I think the US stock market overall is over-valued, but it is just at the upper zone of normal secular bull market valuations – it is still quite far away from the 2000 bubble peak. At these levels, it could decline 25%-60% based on history, but that should also be quickly followed by substantial recovery, including getting higher dividend yields.

    It does seem to me that some tech stocks are starting to move into territory that any bad news could crush the stock values. Similarly, some housing markets have rebounded some but don’t appear to have done that through organic demand. These relatively local aspects may be starting to form bubbles.

  4. everything says:

    We kind of new, after the CDO, Derivatives, robosigning, easy money thing they had going, that they would not do it all over again, in a different way, this time, apparently it’s going to be bonds. But yeah, when the interest rate bumped up, it put the brakes on. In the winter of 2011 mortgage applications hit the skids just like this winter but they also experienced a rate bump, up to nearly 5 percent for 30 year loans! The party is not over yet, it’s just taking a long needed break for investors, flippers, buyers to cherry pick, on the next interest rate dip.

    About the bubble, it’s not the equities, it’s the government!