Robert Samuelson: Is the stock market nuts?

Is the stock market nuts?

By Robert J. Samuelson, Thursday, December 5, 2:42 AM

The question about the stock market is whether the bull is a bubble. The 1990s’ “tech bubble” and the recent “housing bubble” have conditioned us to think that almost any sign of investor craziness is going to end badly — and the stock market seems a bit crazy. At the end of November, reported Wilshire Associates, stocks were up nearly 30 percent for the year, representing a gain of about $4.8 trillion. From the market’s recent low in March 9, 2009, when the economy was in a tailspin, the increase has been 180 percent, or nearly $15 trillion. If you dislike this comparison, then measure the gain since the market’s pre-recession high on Oct. 9, 2007. The increase is 21.5 percent, or $4.2 trillion.What’s more, there’s a widespread expectation that stocks, despite temporary setbacks, will continue to advance. After all, the Federal Reserve is pumping $85 billion a month into financial markets — about $1 trillion a year — by buying bonds. Much of that money (the theory goes) props up stock prices.

The impending change in leadership from Ben Bernanke to Janet Yellen as Fed chairman is viewed positively. Yellen will wait longer, it’s said, to reduce the Fed’s pump-priming. As a Wall Street Journal headline put it: “ ‘Dovish’ Yellen Keeps Gloom at Bay: Incoming Fed Chairwoman’s Message Has Given Comfort to Investors and Fueled Stocks’ Resilience”

Still, all the happy talk will be just that if the market’s surge turns out to be a bubble, which — once burst — wrecks confidence and, perhaps, converts the plodding recovery into a new recession. So, is today’s market a benign boom or a bad bubble?

Here are three crucial facts.

First, investor sentiment has clearly shifted toward optimism. One survey of financial newsletters finds that 57.1 percent are “bulls” (expecting higher stocks) and only 14.3 percent are “bears” (expecting lower stocks). The ratio of almost 4-to-1 is the highest since March 1987, said economist Edward Yardeni of Yardeni Research.

Among his clients — pension funds and other large investors — “there’s less anxiety and more willingness to see the upside,” he said. “When we didn’t go over the ‘fiscal cliff’ [the cancellation of all the Bush tax cuts] at the beginning of the year, there was a huge sigh of relief. People had anxiety fatigue. . . . No one talks anymore about the disintegration of the euro zone.”

Of course, the optimism could cut either way. It may indicate that sober analysts agree that stocks are a good buy. Or it could signal that greed and crowd psychology have taken charge.

Second, the market’s gains are not unusual. Following deep declines, stock rebounds are often large. Since 1932, there have been 13 bull markets, defined as gains of more than 20 percent, according to Standard & Poor’s. For all bull markets, stocks have risen an average of 165 percent based on the S&P index of 500 stocks. Stocks’ present increase through November is 167 percent (the S&P index differs slightly from the Wilshire index cited earlier). By itself, this year’s gain doesn’t suggest an overvalued market.

Finally, growing profits explain much of the market’s increase. In theory, stock prices reflect present and future profits, and — despite a sluggish economy — corporate profits have increased impressively. By government figures, they’re up 39 percent from their 2006 pre-recession peak. Profit margins are near record levels, about 9.6 percent of corporate revenues, noted S&P’s Howard Silverblatt. Higher profits have kept a key stock market indicator — the price-earnings ratio — well within historical norms, found a study by the McKinsey Global Institute, the consulting company’s research arm.

What’s unclear is how much the Fed’s bond-buying, called quantitative easing, has boosted stocks.

Zilch, said economist Susan Lund, co-author of the McKinsey study. “There’s a short-term effect, but then the market reverts to long-term trends,” she said. Improved profitability explains stocks’ rise. If true, cutbacks in quantitative easing won’t much affect stocks.

Silverblatt was less sure. “Definitely the Fed helps,” he said. “There’s more buying, but quantifying [the benefit] is difficult.”

What’s clearer is that stocks and the “real economy” of jobs and production have become disconnected — and that this cannot continue indefinitely. There are practical limits to how much companies can improve profits without stronger economic growth and higher sales. If these don’t materialize, we may discover that the market is not a bubble but a blob that goes nowhere quickly.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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