Investing chatter: Is stock market in a bubble?

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Despite the Dow’s record-breaking performance in July, August and September are historically ranked as its worst-performing months.
USA TODAY

Bubble talk is building on Wall Street.

Driving the narrative of a stock market inflating at an unsustainable pace is the fact stock prices keep going up, even though the SP 500 stock index is trading at more than 21 times its earnings over the past four quarters — or 28% higher than its average P-E of 16.6 since 1965, says Oppenheimer, a Wall Street firm.

New all-time highs for the Dow and SP 500 this week, as well as a continued hot streak for tech stocks is also fodder for bears that argue that stocks are frothy.

The business press has picked up on the angst. In Sunday’s edition, The New York Times ran a story, “When Will the Tech Bubble Burst?” Last month, Business Insider weighed in, “Beware: The stock market trade that could ‘pop the bubble’ by year-end.” And in late June, the business magazine Forbes ran a piece titled, “How The ETF Bubble Feeds The Stock Market Bubble.”

Paul Hickey, co-founder at Bespoke Investment Group, has heard the bubble chatter about the “bull market’s end day being near.” But, for now, he doesn’t buy into the bubble thesis.

For one, he points out “that true bubbles aren’t accompanied by an almost consensus opinion that we’re in a bubble.” He refutes the bubble call by comparing today’s market to a real bubble, the one that burst in 2000, ending a 13-year bull run.

While the SP 500’s current P-E is higher than during a similar phase of the 1987-2000 bull, it’s well below the peak P-E of just over 30 in 2000. The SP 500 tech sector’s gain of nearly 400% in the current bull run, he adds, is far smaller than the 1,323% gain from July 1991 to March 2000.

“For the current market to reach true bubble territory, much more needs to happen,” says Hickey.

More: As Dow moves past 22,000, here are 5 things to remember about markets

More: Too late to jump into a surging Dow? Here’s what to do

More: Four potential Dow killers to watch in August

 

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