Believing all this talk about a stock market bubble can land you in real trouble

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'Calling something a bubble does not make it a bubble...' says MktwHulbert

Repeat after me: The stock market is not in a bubble. I suppose it was inevitable that the stock market’s new all-time high this week would cause bubble talk to bubble up, so to speak. Yet, it shouldn’t need repeating, calling something a bubble doesn’t make it a bubble.

Journalists may also be co-conspirators in the bubble of bubble talk. That’s because, Goetzmann added, “people get real excited when you mention a bubble.” In deciding which headline to choose for a column forecasting a downturn, for example, editors know that “The Bubble that is about to Burst” will elicit far more readers than “The Upcoming Bear Market.”

When the first of these two preconditions is met, according to the researchers, there is a 53% probability of the second occurring. This probability grows as the two-year price runup increases, furthermore. When the two-year run-up is as much as 150%, for example, the probability of at least a 40% drop over the subsequent two years grows to 80%.

By my count, the only one of these other factors present today in a big way is an above-average P/E ratio.

 

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