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Are Equities Overvalued? Are We in a Bubble?

source: flickr

source: flickr

It is a mistake to equate the two questions.

There is concrete evidence that equities are overvalued, mainly due to the monetary policies of the Fed and the world’s other major central banks.  And there are clearly some stocks that are in bubble land (those that have stratospheric P/E ratios).

There are ongoing massive liquidity injections by the Fed ($55 billion/month), the Bank of Japan, the Bank of England, and, apparently, the European Central Bank is considering a similar program.  The newly created money has to find a home.  Interest rates are artificially low, so the fixed income market is not attractive, and a slowdown in Emerging Markets (like China) has already caused a significant correction in those markets.

The U.S. equity market appears to be the safest, especially because our economy looks to be gaining strength despite a rough winter.  The Fed has signaled several times that its quantitative easing program is ending, and there doesn’t appear to be any foreseeable reason for the Fed to stop the taper.  The reduction in new liquidity has to have an impact, and there is a significant risk that it will occur in the U.S.’s equity market as the taper comes to an end.

But, this is not a bubble like we saw in 2000 or 2008 when most of the market multiples were in nosebleed territory.  A few high tech stocks are there, and a few of them have already seen significant corrections. Some of the best performing technology stocks in 2013 are down around 20% from their highs, Netflix, Tesla, Amazon, and so forth. Many biotech stocks have experienced steep declines from their tops as well.

Corrections are inevitable.  It would be a mistake to think that the withdrawal of the Fed’s massive liquidity program won’t have any impact, so money that has to be invested should be done with an eye toward value and the longer term.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee.

Contact Robert Barone or the professionals at UVA (Joshua Barone and Andrea Knapp) who are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

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