Is Trump right about a ‘ big, fat, ugly bubble’?
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 superloose 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, some 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) 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.