Some investors tend to believe the stock market is a perfect and balanced barometer of the underlying economy. Even with the recent bubbles in technology stocks and real estate, some still have this misguided assumption that stock values are always priced right. Most of the movement in the market is being driven by institutional investors since roughly half of Americans own absolutely no stocks outright. It should be rather obvious to those that read a few newspapers outside of the country that there are some major risk factors hitting the world right now: the Ebola outbreak, the conflict between Ukraine and Russia, and the Middle East. You also have anemic economic growth in Europe. In the US 92 million Americans have dropped out of the labor force. Yet somehow, the stock market is making new highs. Why? A large part of profits have come from firing workers, slashing wages, cutting benefits, and using cheap QE funding to juice up stocks. The market cares only about profits, not long-term sustainability. Yet if you were looking at the volatility index you would think that there was absolutely no risk in the current market. This market is looking very bubbly.
Bubbles are hard to define and spot. Bubbles are largely driven by psychology and emotions and move in an eradicate fashion. A bubble occurs when an asset, commodity, or stock for example moves up in price with very little economic fundamentals to support it. For example, real estate moving up with no actual income growth but people using leverage to go deep into debt. Some tech companies today are looking very bubbly based on their earnings.
The stock market is looking extremely frothy at the moment:
This post was published at MyBudget360 on September 5, 2014.