Is Trump right about 'big, fat, ugly bubble'?

 

Federal Reserve Chair Janet Yellen said Wednesday that the central bank has no "fixed timetable" for raising interest rates but she believes the economy is ready for a rate hike by the end of the year.

Bubble talk is bubbling up on the presidential campaign trail.

Nobody on Wall Street disputes that the stock market is pricey by historic standards. But are stocks — juiced by the Federal Reserve’s low interest rate policy — in a “big, fat, ugly bubble” that will end badly as Donald Trump warned at the first presidential debate?....

Trump, the Republican nominee, isn’t the first person to warn of a bubble. Nor is he the first to cite super-loose Fed policy as the root cause. Bubble talk has been circulating since last September, when billionaire investor Carl Icahn warned of “danger ahead” and told CNBC: “We’re in a bubble.” Since then, other heavyweights, including real estate titan Sam Zell, bond king Jeffrey Gundlach of DoubleLine Capital and former hedge fund titan Stanley Druckenmiller, have warned that many investments have been massively distorted by Fed intervention and that financial pain will ensue once the bubble pops.

Still, the notion of stocks being in a bubble is getting pushback from other Wall Street pros who say the typical ingredients of a bubble are absent.

Stock values, while elevated, are not at nosebleed levels, they say. Irrational exuberance is also missing.

“No, the market is not in a big bubble,” says Michael Farr, CEO of money management firm Farr Miller & Washington. “It's expensive, but it's not wildly speculative.”

The Standard & Poor’s 500 stock index’s current price-to-earnings ratio (P-E) — a common metric used to determine if the market is cheap or frothy — is far from bubble territory. The trailing four-quarter P-E on adjusted earnings is 18.7. While that's above the long-term average of 15 to 16  times earnings, it's well below the P-E of nearly 30 at the peak of the dot-com stock bubble in 2000.

What’s also missing is a stock-crazed nation where taxi drivers turn into day traders in hopes of making a fast buck in stocks.

“I don't get the sense that everyone is 'all in' like they were in real estate in 2007 and tech stocks in 2000,” says Paul Nolte, senior portfolio manager at Kingsview Asset Management. "Many investors remain wary of stocks. When we read about everyone getting rich on the market and the many ‘can’t miss’ opportunities, then we’ll be in a bubble.”

That doesn’t mean stocks won't stumble if the Fed starts hiking rates, warns Mark Luschini, chief investment strategist at Janney.

“The stock market is still vulnerable to a shakeout,” he says. “Still, absent an aggressive move higher in rates, I think the market’s negative reaction to a small lift in rates would be brief.”

 

source, US TODAY