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.
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.
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.
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
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?
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.
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...
Copyright © 2014 Microsoft. All rights reserved.
After enjoying a smooth rise in stock prices since May, investors are about to be hit with another bout of volatility.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.