Over the past few months, many experts have been trying to make sense of the performance of the US stock market. It has been on a roll for about two years now! Is it too good to be true? Are we in the midst of an investment bubble? Economists are debating the issue now, as it’s hard to identify one during the moment.
It’s hard to find information that can help you make up your mind. Either, it’s an overs implication of the facts, an exaggerated piece written by someone looking to scare the reader, or so academic that you can’t fully understand the article. Below are a two pieces that I’ve found to be helpful.
The chart below suggests that we are (and have been for quite some time) outperforming the long term average of the market. There is always a reversion to the mean. It may happen in 20 years or tomorrow. I like this chart because it puts the past few years in context.
Robert Shiller, Nobel Memorial Prize recipient in Economic Science and author of Irrational Exuberance, outlines six points that can contribute to a bubble:
- The sharp increase in the price of an asset or share class
- Great public excitement about these price increases
- An accompanying media frenzy
- Growing interest in the class among the general public
- ‘New Era’ theories justifying the high price
- A decline in lending standards
Some of these conditions appear to have been met, but many have not. Lending is still has high standards and much of the general public has not participated in the market. They are still cautious.
I think many people are confusing an economic bubble with a normal market correction. Will we experience a 5%-10% market correction in the near future? Most likely. Will the bubble burst bringing us back to the lows of 2009? Probably not, but you can never tell.
This serves as a reminder to keep to your investment strategy. It’s all too easy to make an emotional decision and jump on the band wagon as the headlines tout new highs. But that’s where people can get in trouble. They load up in one asset class at the wrong time.