Stock Market Report 2016: Is This Another Bubble?

So January was an awful month for the global stock markets.  According to most reports, it was the worst start to the year ever.  In fact, the drop began on December 30th and just gained momentum into the new year.  Measured against recent market highs, several market indices had dropped by over 12 percent before mid-February.  That rapid loss of market value certainly reconstituted the fears and anxiety we experienced in 2000-2001 and 2008.  You probably recall that the former drop was the “tech” bubble and the latter was coined the “housing” bubble.  Has another yet-to-be named bubble formed since then?

Before I opine, let’s review a simple evolution of the market levels today and some contributing factors as to how we have arrived here.

By the end of the housing bubble, the broad market indices had been cut in half from recent highs.  The mortgage derivative and related products industries had collapsed and taken much of the economy and many jobs with them.  As we reflect, calling that a difficult time is a great understatement.

In an effort to support the economy and promote spending, the Federal Reserve undertook some unorthodox policies to maintain low interest rates which are still evident today. One result of the Fed actions was very low interest rates on treasury bonds, bank savings and similar accounts.  Simply stated, there was almost nowhere to earn interest for many years.  Now where would the multi-billion dollar pensions, trust accounts, mutual funds and Wall Street put money to at least earn dividends?  That’s right, the stock market.   In fact, I reference the size of the market since 2008.  Since the lows of 2009, the total value of the primary US index has roughly tripled…in 7-8 years!  One should ask, how and why has that happened and could it be justified?

So has a bubble formed in the stock market as a result of a huge demand imbalance of stock buyers who arguably had nowhere else to go for well over 5 years?  I believe the answer is yes and further, I cannot see how a bubble doesn’t exist.  Although much evidence can be cited in addition to the demand rationale above, I would direct you to locate a chart of the US stock market that covers at least a 30-year timeframe.  Pay close attention to the period from 2008 until today vis a vis any other time frame and you should become very concerned, especially when superimposing the true state of our economy during that same time.  Again, what could have supported the market values tripling in that period when most folks agree that things were not that great?  And will we look back in a few years and just say that things were fine?  Certainly,  that’s possible.  But I think it is very clear that some added caution should be exercised as we move through the next year or two.