Is There a Stock Market Bubble? Bernanke Says No

We can all breathe a sigh of relief: Federal Reserve Chairman Ben Bernanke has said that there isn't a near-term risk for an inflationary spike.

For the most part, I can't help but agree with the Fed chief. As he noted, there is a lot of "slack" in the economy that will help prevent price inflation from rearing up in the near future. The "slack" basically means that for a wide variety of labor and goods, there is a lot of unused supply coupled with weak demand.

With a rate decision on tap for today, the Fed will likely use this "slack" as reason to keep its target rate at the 0% to 0.25% range where it's been hovering for a year now.

Interestingly, though, Bernanke also said that he doesn't see any sort of asset price bubble developing, saying specifically that "there is not much evidence to suggest that the stock market is currently in a bubble."

While overall price inflation is certainly a concern, for investors the prospect of easy monetary policy leading to asset bubbles may be the more pressing question. Since the beginning of the year, oil has come back significantly, while some metals like copper have had very significant runs. While this may be good for energy giants like ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) and miners like Southern Copper (NYSE: PCU  ) and Freeport-McMoRan (NYSE: FCX  ) , it could crimp profits at companies that use these products as inputs for finished products.

At the same time, the S&P 500 index has gained more than 60% since its March low, and the index is trading at more than 24 times expected 2010 earnings. Considering that between 1988 and 2008 -- a period that included the Internet bubble -- the index's average multiple was below 23, I find it hard to call today's valuation cheap.

Easy monetary policy could help spur the stock market even further, but I think investors may be best served by sticking with companies like IBM (NYSE: IBM  ) and CVS Caremark (NYSE: CVS  ) that have solid, stable businesses and still carry reasonable valuations.

An investor who doesn't make mistakes is likely an investor with no money in the market. Fellow Fool Dan Caplinger recently invited readers to share their worst investment mistake in 2009.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


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  • Report this Comment On December 16, 2009, at 11:15 AM, Adam1226 wrote:

    Bernake's predictions have been right on the money so far. If he says there's not going to be near-term inflation, then I believe him. I'll sleep much better tonight.

  • Report this Comment On December 16, 2009, at 11:43 AM, AvianFlu wrote:

    I smell sarcasm...

  • Report this Comment On December 16, 2009, at 12:22 PM, PeteysTired wrote:

    Hail to our man of the year Ben Bernake!!! He is so smart and benevolent. Time says so! I just wish he would share with us all of his beautiful models that predicted this recession/depression. Clearly if he doesn't see a stock bubble, then it isn't so.

    Irrational exhuberence be damned!!!!!!! Yahoo.

  • Report this Comment On December 16, 2009, at 3:31 PM, plange01 wrote:

    no unemployment or forclosures either!bernanke was nominated for man of the year by goldmans sacks employee's who stand to make billions in bonus money from the taxpayers money bernanke gave them...taxpayers would like to see him in jail for 10 years or more!

  • Report this Comment On December 16, 2009, at 5:57 PM, MORK000 wrote:

    Bernake is right there is no bubble just plain water and we are sinking.

  • Report this Comment On December 16, 2009, at 6:22 PM, edallan wrote:

    And Ben Bernanke has been so right on the target the past couple of years.

    I have called my Senators to ask them to join Bernie Sanders in rejecting his renomination.

  • Report this Comment On December 16, 2009, at 8:42 PM, tomd728 wrote:

    At least Gentle Ben is not in the like his predecesor

    in screaming for headlines with the "fire " ! in crowded

    theatre speeches.

    Now there's a guy we owe a lot to.We can look at two

    major Market bounce backs and give him credit for

    at least one in that he put the Market where all it could do is rebound.

    I miss that saxaphone playing as well.

    What a pompous jerk.

  • Report this Comment On December 16, 2009, at 8:51 PM, xetn wrote:

    Is this the same Ben Bernanke that said there was no real estate bubble? Yeah, he really has vision and insight. Ron Paul is right; time to End the Fed!

  • Report this Comment On December 16, 2009, at 9:24 PM, fchain911 wrote:

    Is incredible that bernake is still in place while , although he didn't was the main responsabile of this disaster, he didin't do anything to prevent it or at least minimize it impact. By increasing interest rates he foster credit crunch for later reduce it to near 0%...

  • Report this Comment On December 16, 2009, at 9:33 PM, modeltim wrote:

    Financial advice from a Fed Chairman? You've got to be kidding.

    That's like the Czar of Russia taking advice from Rasputin and look what happened to him and his family.

  • Report this Comment On December 16, 2009, at 11:21 PM, bearbitten wrote:

    so, he sees no near-term, hmmm...watch out for mid and long term. he must have a brown bag over his head.

  • Report this Comment On December 16, 2009, at 11:59 PM, goalie37 wrote:

    I find it interesting that you use the average multiple from 1988 to 2008 as a model for what does and doesn't constitute a bubble. The dot com bubble was in 1999 and 3 months of 2000. Smoothing this out over a 20 year time period shows nothing. You could have picked any random assortment of years to make your point.

    P/E ratios are slightly inflated at the moment due to one factor: In a recession, stock prices (P) begin rising beforethe underlying earnings (E). Therefore multiples will always seem overvalued during the first few months of a recovery.

    Most of us were in the markets for the last stock bubble. P/E ratios were often well above 100, in the cases where there were earnings at all. This market is becoming short on bargains, but the tell tale signs of a bubble - people quitting their jobs to become day traders, piles of worthless IPOs flooding the market, parties filled with novices bragging about outsized gains - are not here.

    This most recent downturn in the markets has one fascinating aspect to it. In the vast majority of market crashes, the market leading up to it is vastly over valued. The market in 2007-2008 was only slightly overvalued in respects to reasonable earnings expectations at the time. The fact that we bounced back so quickly is due to this fact. Stocks of solid companies were trading at once in a lifetime bargain prices at the bottom. 60% may seem like a huge run up, but you have to take into account where that 60% started.

  • Report this Comment On December 17, 2009, at 12:01 AM, goalie37 wrote:

    Okay, this is getting old. I have written two rather lengthy posts tonight, then had them disappear after hitting "Pos Your Comment." I'm done for the night.

  • Report this Comment On December 17, 2009, at 3:53 PM, TMFKopp wrote:

    @goalie37

    You are correct in that single-year P/E's are not always the greatest measure of valuation, particularly during a recovery period like we're in now.

    Check out the valuation data from Robert Shiller though (http://www.irrationalexuberance.com/). He measures valuation as price versus average 10-year earnings. As of today, that measure is well above the long-term average.

    Are we in a full-fledged bubble? No, probably not. But for investors that are looking for better than mediocre returns, it's becoming increasingly difficult to find good opportunities.

    Sure, we don't have the mania that typically accompanies and characterizes bubbles, but that doesn't mean that we should be complacent about inflated valuations.

    Matt

  • Report this Comment On December 18, 2009, at 2:06 PM, bigjohnson2 wrote:

    investing nowdays makes as much sense as obama being the "prince of peace"

  • Report this Comment On December 18, 2009, at 2:10 PM, goalie37 wrote:

    I agree that we have inflated valuations Kopp. But I believe these to be in the slightly overvauled area. Very few bargains are out there for a value investor like myself, but I maintain that slightly overvalued and bubble are too vastly different things.

  • Report this Comment On December 19, 2009, at 10:30 AM, WishToRetire2 wrote:

    Isn't it true that you we could still see a major downturn happening in the next year or two.. even if we aren't in a bubble.

  • Report this Comment On December 19, 2009, at 10:37 AM, WishToRetire2 wrote:

    Isn't it true that we could still see a major decline next year...even if we aren't in a bubble.

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