Unfortunately for the so-called permabears, this is not a stock market bubble. Corporate and economic reports show strength across many sectors.Here are five reasons to have faith that the recent softness in the stock market is not a sign that a bubble is popping.
Data is good: The biggest problem with bubble talk is that it ignores the facts. For instance, the unemployment rate is at 6.1% — the lowest since September 2008. And while bubble believers like to claim this is just from people leaving the labor force, the Fed noted in July that new jobs among the long-term unemployed accounted for 88% of the drop in the unemployment rate this year. I’ll repeat that: The continued decline in unemployment is because those out of work for more than six months are finally finding jobs.Also note that second-quarter GDP expanded at a brisk 4.2% pace, residential home construction in August was up 8% over a year earlier, and so on. But chances are if you believe there’s a bubble, you think these statistics are all lies anyway.
While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% - the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!
And that's how you get a fresh cycle low in the unemployment rate.
DYI Comment: The chart below speaks for itself.
Skepticism, not exuberance: Alan Greenspan coined the phrase “irrational exuberance” in reference to the dot-com bubble in 1996, and the two words have been synonymous with bubbles ever since. But there is no evidence of irrational exuberance today. Even if you want to gloss over all the material improvements in the economy, let’s simply consider the preponderance of bubble talk and skepticism that’s out there — as evidenced by the headlines “G20 finance ministers add to fears of a stock-market bubble” on Yahoo! Finance and “Is the stock market bubble of 2014 ready to burst?” here on MarketWatch. You can find even more on sites like ZeroHedge or in CNBC clips from the permabear du jour. The volume of this chatter says a lot about the lack of exuberance.
DYI Continues: Admittedly there is not out right exuberance but there is massive complacency in all market sectors. Plus, due to the Fed's sub atomic low interest rates they have driven savers into seeking yield without the knowledge of risk. Basic savers have been herded into the markets even though it is out of desperation, not greed, the effect is the same. These are the "last in", basic savers, signifying the formation of a market top.
Valuations are fair: Let’s look beyond macro data and broad sentiment and get into the market itself. A common canard among the bubble crowd is that stocks are grossly overvalued, but a closer look reveals that’s simply not the case. The forward price-to-earnings ratio of the S&P 500 is about 16.8 — high relative to the past few years and with select periods in history, but well below the 15-year average, according to data from market research firm FactSet.Remember, forward earnings estimates can often be way off. And, of course, the S&P 500 was trading at a low multiple during 2008 and 2009 when the global economy was melting down and earnings forecasts needed to move lower. This is not to say stocks are a bargain; it’s just that valuations are fair. And a choppy, fairly valued market is by no means a sign of a bubble.
DYI Continues: Valuations are Fair??? The market it now more than 2.5 standard deviations above the mean. Market valuation to be fair would be at its mean which is a long way down from this very expensive stock market.
OR....
The current S&P 500 dividend yield is 2.01% this foretells a 10 year estimated average annual return of 1.3%. That is less than the return on
10 year Treasuries at 2.34%.
Estimated 10yr return on Stocks
Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.
Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%)
2.0%------------1.3% You are Here!
2.5%------------------------3.8%
3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%------------------------9.4%
4.5%-----------------------10.9%
5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%
7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%
*Starting dividend yield of the S&P 500-**10yr estimated average annual rate of return.
Fed tightening isn’t a bad thing: In case you missed it, last week I did a deep dive into how stocks have performed during periods of rising interest rates. And since 1960, almost every period of rising rates has been accompanied by rising stocks. The reasoning is simple: The Federal Reserve loosens policy when times are bad, and tightens when the growth outlook is good. The bottom line is that unemployment is falling and businesses are slowly increasing spending, not cutting back. This is not the “stagflation” of the 1970s. The economy is growing, and inflation is below 2% and hasn’t been above 3% since late 2011. Rather than see the Fed as the cause of more trouble, investors should instead see overtures at tightening as a sign of confidence in the economy and the market at large.
DYI Continues: Take a look above at the Buffett Valuation Indicator for the 1950's and 1960's for a good portion of those markets were BELOW the mean of the market, interest rates had no effect upon the outcome. Currently today with a sky high market increasing interest rates will create a competitive environment for stocks as future returns on bonds will be enhanced due to higher rates.
Additional Articles:
Noted stock market bear points to increasing nervousness and volatility
All investors have a sure-fire signal for when to liquidate their portfolios and head for the hills. We highlight one investor's concern that markets are a 'basket case'. Certainly you can feel the increasing nervousness in the market. Volatilities are definitely on the rise.
Institutional investors are also getting increasingly nervous that we have reached the end of the road and a major market top may be forming in equities. Notwithstanding particularly concerning economic data out of the formerly reliably robust Chinese and German economies, many market commentators are pointing out that US inflation expectations have now slid to levels that previously triggered the Fed to enact QE - yet there seems to be absolutely no prospect of that occurring currently. Quite the reverse.
So maybe it's time to stop dancing and sit this one out. Am I calling a top? What's the point? As an uber-bear I am used to being called a stopped clock. By contrast the market embraces a bullish forecaster however often they are shown to be overly optimistic. The IMF's forecasts for world growth have just been published and guess what - it sees world growth rebounding, just as it has done consistently for the last few years! The market doesn't care that the IMF has been serially wrong and that its forecasts resemble a series of hockey sticks (H/T Zero Hedge). The market loves a bull, even if it is a stopped clock too.
And who can expect the same growth rate as we had over the last 50 years? From ‘bond king’ Bill Gross:
‘Growth in the US and elsewhere has been facilitated in the past 30 years by the expansion of credit and leverage. Once capitalists recognize that they can’t continue to accumulate leverage at the same pace, growth slows. Demographics also are contributing to diminished economic growth. The boomers aren’t booming. They are getting older and retiring.
‘Most boomers need health care, but they don’t need another house or a third car. The aging of our society is putting curbs on economic growth. Thirdly, technology is a boon and a wonder, but it also has eliminated jobs that aren’t being replaced at the same pace. Apple is a wonderful company, but it doesn’t hire as many people as the old General Motors.
‘Finally, globalization is an issue. The US has been the world leader in globalization since the end of World War II. We have benefited from mercantilistic expansion, and because the dollar has been the reserve currency. Now things are turning sour elsewhere. When you fly into headwinds, you fly at a different speed.’
We’ve spent our entire life in a credit expansion. We began life when the cork came out of the credit jug. We’ve all been pulling hard on it ever since.
Credit juiced up the economy…and the stock market. Heck, we’ve lived on it. We’ve taken TVs from China. Autos from Japan. Wine from France and Italy.
‘Hey, we’ll pay you later,’ we said.
What if ‘later’ were now?
Regards,
Bill Bonner For The Daily Reckoning Australia
The latest truck concept from Mercedes-Benz doesn’t look like anything crazy. Its design is a bit unusual, and it’s loaded up with LEDs instead of headlights and cameras instead of side mirrors. But those modest tweaks to conventional design hide the fact that this is a serious bid to revolutionize the trucking industry. That’s because the “Future Truck 2025″ drives itself. And while it’s a prototype, Mercedes is serious about spending the next decade getting it—and us—ready for commercial use.
Autonomous driving is nothing new for trucks in agricultural and military applications, and should be available for passenger cars by 2020. But trucks that share our highways are tempting candidates for shedding their human component: Highway driving is easy for computers but dangerous for us, especially when big machines are involved. In 2012, according to NHTSA, 333,000 large trucks were in crashes in the US. Those accidents killed nearly 4,000 people, the vast majority of whom were riding in passenger vehicles. Regulators have trouble ensuring that drivers get adequate rest, and the trucking industry has fought back against regulation.
DYI
