Saturday, April 16, 2016

The BIG Picture

Are we in a stock market bubble?  I think about this question a lot more often nowadays and generally speaking my answer is no.  There are certain things that characterize a bubble for me such as accelerating inflation and interest rates as frenzied borrowers attempt to acquire more money to throw at the bubble.  We actually have the opposite of these two characteristics at the moment which would lead me to believe that we are still in somewhat of a recession. 

To help with maintaining perspective and to avoid overfocusing on near term events I like to keep a long term 60+ year chart of the S&P 500 $SPX handy.  On this chart I also like to plot 7% and 8% annual growth rates because the market has tended to be somewhat constrained by these two rates of growth over the long run.  Looking at the data from this higher level perspective helps to show that the Dot Com Boom was abnormal with the Housing Boom and the subsequent Great Recession within the normal range of long term growth.  Currently we find ourselves smack in the middle of these two rates with the downside limit near 1500 and the upside limit near 2500.  Even though these upper and lower bounds represent normal price movement to me...the majority of the investing public would be ready to declare a depression if the market were to fall 20% or a new era if it were to rise 25%.  This is one of the main benefits in keeping a long term perspective to avoid misinterpreting normal price movement as extreme price movement while relying on too narrow of a focus. 

Furthermore, these bounds would only represent normal price movement but as we all know the market can become abnormal fairly quickly.  With this in mind, I still could not be shocked if the market were to fall all the way to 1000 or rise as far as 4000.  Keeping the BIG picture in mind is so important whether it be prudent investing or anything else in life and to be successful one must practice doing this all of the time.  The more history that you can bring into the picture on not just equity prices but commodity prices as well as interest and exchange rates, the better and more robust your perspective will be.

To recap, with global interest rates and commodity prices near all time lows and the dollar exchange rate and equity prices near all time highs...I just cannot see a bubble at this time.  The absence of a bubble however does not mean that the market cannot still fall substantially so I wouldn't be getting too excited.  Whatever opinion you decide on for yourself remember as always...stay diversified and think long term.