5 reasons the market is not in a bubble

Talk of a looming crash makes for great TV, but in reality the numbers show that investors shouldn't be so worried.

By Benzinga Mar 13, 2014 2:09PM

A bubble next to the NYSEBy Matthew McCall


An online search for "stock market bubble" is cluttered with pundits calling for the end of the bull market.


What is interesting is that the same talking heads have been preaching the bubble talk for months, and even years, as stocks hit all-time highs.


Perma-bears will never make money in the stock market over the long term, and below are five reasons they should shut their yapping mouths about a possible stock market bubble.


1. History

An argument that is often voiced by the bears is that the market will be down in 2014 because it saw such a large gain in 2013. That may be enough to convince many investors, but in reality it is flat out untrue.


Since 1947, the S&P 500 ($INX) has averaged a 31 percent gain during its 10 best performing years. Last year the index was up 30 percent, right in line with a top-performing year.

In the year that followed each of the top 10 years, the S&P 500 was up an average of 14 percent. If 2014 were to follow the average, it would put the index at 2,106, well above where the S&P 500 is today.


2. Retail investors

This is yet another argument that the bears will say falls in their favor, but again they are simply lying to investors. A Gallup Poll shows that only 52 percent of U.S. adults were in the stock market last year. This is not only the lowest level in 15 years, but it is also well below the over-60 percent readings that occurred when the markets entered into new bear markets.


Since the start of 2008, mutual funds that invest in domestic stocks have seen outflows in 52 of the 72 months, according to Investment Company Institute. Net inflows into the category totaled $18.4 billion, versus $259 billion in 2000, when the Internet bubble burst. 


Unfortunately retail investors are still on the sidelines, and until they rush into the market, a bubble will not occur.


3. Corporate profits

When investors buy into a stock, they are essentially buying into the money the company makes and is expected to generate in the future. With corporate profits at an all-time high, it could be an indication of a bubble to the bears, but in reality it shows the strength of the corporate economy. In 2013, when the naysayers were bashing corporations, the earnings for the S&P 500 rose an impressive 11 percent.


During the fourth quarter of 2013, the earnings for the S&P 500 grew by approximately 8.5 percent. This despite what the bears were calling an "ugly" holiday season.


4. Valuations

If you analyze individual stocks, sectors or the entire market, it is clear the valuations are not as attractive as they were a few years ago. That said, the market is nowhere near a level that is associated with a bubble.


An earnings estimate of $120 per share for the S&P 500 in 2014 gives the index a price-to-earnings ratio of 15.5. The current forward P/E ratio is below the 15-year average of 16.0 and slightly above the average going back to the 1870s.


The most important aspect of the number is that it is well below the mid-20 levels that have been associated with major bubbles. The average estimate is for earnings to grow by 9 percent more in 2014, leaving plenty of room on the upside for stocks.


5. Best game in town

Here is a list of options for investors.


First, a savings account that pays an interest rate that makes digging a hole in the backyard look just as attractive.


Second, lending money to the government via a Treasury bond for 10 years at an interest rate of only 2.76 percent. 


Third, invest in gold and precious metals that have been in a downtrend for two years. Or look to the stock market, which is trading below its average valuation and is growing earnings.


Investors are smart enough to determine the correct answer to the question and realize that while the bubble talk makes for great TV, in reality the numbers are not there to prove we should be worried.


More from Benzinga

199Comments
Mar 13, 2014 2:24PM
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Not a Bubble !!! ha ha ha  Its all legit, economy is getting better ?  Govt is growing like a weed  and businesses are downsizing and closing stores just ask Best Buy,Staples.Radio Shack,Sears,JC Penney ,Sbarro,  We are being lied too !!!
Mar 13, 2014 2:30PM
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Yes, it is a bubble that has been kept inflated by the Fed's Quanitive Easing for the last five years. Our country's debt that is known to most is over 17 Trillion dollars and now people who know the market say the Global debt is over 100 Trillion. So yes it is a bubble, it is fake prosperity except for the very wealthy. Just look at Greece, Italy, Spain, Ireland and England so for some examples. Remember that Mainstream Media will tell you everything is fine right to the end. Just like the crash in 2007-2008, there were plenty of people warning that something was wrong but the Mainstream media kept reporting everthing was OK. Well they were wrong like 99% of their fake stories. All info can be found on the internet, just investigate yourself.
Mar 13, 2014 2:25PM
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This is the third bullish article I've read on MSN today as the DOW and S&P drop more than 1%.

 

You guys are just having some fun jerking us around, right?

 

Mar 13, 2014 2:30PM
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The fact that MSN and everybody else continues to try to convince us we're not in , or approaching a bubble should be cause for concern. Values of most issues do in fact exceed the value of the companies they represent.


To believe that they can just continue to rise day after day irrespective of their real values is ludicrous.

Mar 13, 2014 2:30PM
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I am guessing this was a paid for article by either Wall Street or the Fed.  It certainly is not accurate, so I am assuming it is propaganda.
Mar 13, 2014 2:27PM
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 I just don't want to get screwed again.
Mar 13, 2014 2:38PM
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Regardless how much the market drops MSN and all the financial advisors and other "experts" will continue to promote and hype stocks.  In addition when the market does drop they all have an excuse such as weather, crisis in Ukraine, profit taking etc. butt nobody is willing to tell the truth that we have a weak economy, minimal job growth and a govt who continues to buy bonds and treasuries at a rate of over 75 billion per month.  Wall St is like a junkie that is being kept high due to its drug dealer who in this case is Uncle Sam!!  We need to go cold turkey before we can begin the healing and rebuilding process but based on reality and not lies, manipulation and false intervention.
Mar 13, 2014 4:53PM
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Been around for awhile. Let me tell some of you young folk what a healthy economy looks like. Banks pay 5 to 6 percent to you to keep your money. Loans are plentiful. Unemployment rates of 5.5 percent are considered normal. The united states government leaves you alone instead of nickle and dimeing you to death. Sadly you young people will never see this happen.
Mar 13, 2014 2:46PM
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No, it is not a bubble. It is just a floating spherical-shape object populated with air. 
Mar 13, 2014 3:13PM
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oh....and tell tell poland they arent tanks they are just street sweepers.....
Mar 13, 2014 2:46PM
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Just pull out the rest of the Fed faux-money pumped into the economy every month, and watch what happens to this market!  Wall St hangs on every word from Fed governors after their OMC meetings each month.  Remember, this article appears on MSN Money.
Mar 13, 2014 3:15PM
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With no fed prop , you get one BIG drop . Actual value of the companies in the market (including inventory , property , and all assets etc) is approx 60% of the current market value . Even with  dividends considered , the market is a disaster waiting to happen . Everybody having a  " get rich quick " mentality has driven the true investors from the market , as well as artificially  inflating values . Not trying to be a doomsdayer , but it isn't a matter of if it will drop big , it's when .
Mar 13, 2014 3:50PM
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Same old same old. It'll be right back Friday due to positive outlooks on Ukraine. Its the pattern. They drive it down then pump it back up. Its so obvious even a blind man can see it, manipulation at its finest.
Mar 13, 2014 2:47PM
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Wrong, Wrong, Wrong, Wrong and Wrong. Be warned.
Mar 13, 2014 3:13PM
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Wow, I'm worried now. If the media in our country starts harping about drought, the wise amongst us get the sandbags ready for the upcoming flood.
Mar 13, 2014 2:50PM
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They always try and elude us from the obvious. Let me see, How does that saying go? Oh! DON'T PISS DOWN MY LEG AND TELL ME IT'S RAINING...
Mar 13, 2014 3:16PM
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INFLATION:


The water's  getting  choppy and the boat's about to sink.. You don't think so..

                     ........ Find Me A Deal in the DOW.......

Interest is rising.. Bonds aren't being bought.. Wall Street to expensive...

Mar 13, 2014 2:49PM
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Screw the bubble nonsense macro economics says something totally different.  It will take 20 years or so for these Emerging Markets to come to profitability. You think folks will wait that long? In the mean time the US markets are dead money.
Mar 13, 2014 3:14PM
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What I love most is just do the opposite...like this morning on the squakbox, news can out unemployment fell, the market went up in pre-trading hoping the few suckers out there would bite...."by on rumors,sell on the news" you have all heard this phrase before....so when enough fell for it, they they tanked the market, but at the same time the bulls brought the shorts at early day then they sold the long positions after that riding the short to the upside, if the markets closes below 200 then we all know this is just a game and not the beginning of a sell off, follow the bow....up in the morning down mid day then up at the end....then we are still in a bull position, down morning up mid day then down at the end of the day bear position of coarse nothing is written in stone as we all know the market has a lot of hands to play....bottom line the market is rigged and when you understand this you can play it to your advantage......we all know stocks are over valued right now I don't care what they say, take out the GOV QE 1000 program and all changes
Mar 13, 2014 3:31PM
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Don't forget everyone, the Congress and house own a lot of stocks must be great to control your own shares by manipulating them with QE' sss...if you go to the NET you can look up the top 10 stocks they own I do know ATT is one and Exxon
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