Stock Market Bubble

Unappetizing early bubbles

If someone mentioned bubble gum when I was a kid, it evoked positive thoughts; although, looking back, I’m not sure why. It must have been the times when I was allowed to chew it—playing baseball and swapping collectible cards.

The positive vibes had little to do with the product. Back in the 1950s, bubble gum basically came in two forms (not counting the bubble-gum cigars that are now definitely not PC).

The first can only be termed a small brick-like creation that came in a tiny cartoon wrapper (the Fleer Funnies). Since 1928, it has been sold under the label Dubble Bubble. Despite its spare appearance, it’s still probably a surprise that it was invented by an accountant.

The other source was equally unappetizing. It, too, originated from a manufacturer of the brick-like gum, with its own Bazooka Joe comic wrapper. But by 1952, a new marketing gimmick was discovered by the company when it released its newly minted Topps baseball cards. Each bright yellow package included collector cards that eventually featured everything from baseball stars to construction equipment, and a slim, pink, rectangular piece of bubble gum. It, too, was hard. In fact, it was so rigid it would shatter like a pane of glass when you dropped it on the floor.

Of course, the unappetizing nature of both of these products did not deter me and my brothers as preteen boys. We would quickly stuff the pink concoctions into our mouths as we read the comic or flipped through our newly acquired cards.

The sugary sweet gum gave our jaws more exercise than the bargain-cut of steak our mom fed us earlier in the week. The gum’s flavor quickly wore away, and we either swiftly spat it out or, more likely, added new fuel to the growing chaw within our mouths.

New-generation bubbles

As is often the case when generations change, my sons had a very different experience with bubble gum. Incredibly, at least to me, both of the former products survived. But they were joined in the marketplace by three new entrants: Bubble Yum, Big League Chew, and Bubblicious (their favorite).

The new competitors all had one innovation in common. They were soft. Each began as a pliable confection. No more jaw-exhausting chewing or pieces like shards of glass to fight through to savor the sweetness inside. And there were many flavors, not just the pink, bubble-gum flavor of the originators.

Although Bubble Yum was the first soft bubble gum, Bubblicious stood out because of its marketing campaign focused on seeing who could blow the biggest bubble. Begun in 1978, the “Ultimate Bubble” campaign sparked nationwide and international interest for many years.

World records were set, and 28 flavors were introduced. The blue cotton candy flavor even became the “smoking gun” in the murder trial of former New England Patriots tight end Aaron Hernandez.

While the new gums had lots of flavors, they inherited two characteristics from their 1950s ancestors. Eventually, the flavor disappeared, and no matter how big the bubbles were blown, they always burst.

Not surprising, the Wiktionary provides two definitions of bubblicious: (1) bubbly and delicious and (2) relating to a bubble in an economic sense.

Economic bubbles

Like the confections, economic bubbles are sweet in the beginning, but the flavor always wears out, and the bubbles always burst. The long history of financial bubbles was recently discussed in an article entitled “Are Index Funds the Next Market Bubble?” in Proactive Advisor Magazine.

While bubbles are great to investors during the beginning of the cycle, they, like the bubble-gum version, always seem to end badly. When bubble-gum bubbles burst, you can find the sticky mess everywhere—usually all over your face and, in the most unfortunate cases, your hair. But when an economic bubble breaks, it is the investor that can also end up broke.

Hence, there is much made about avoiding bubbles. And today, as we “celebrate” the anniversary date of the beginning of the last market crash, and the initialization of the current 10-year-old market cycle, there is a lot of talk that we are in yet another stock market bubble, rivaling the bubble that burst in March 2000.

S&P 500: 1990-Present

I am afraid that all of this talk of bubbles may persuade many to either abandon stocks or put off investing. Simple dollar-price-change charts used regularly in the financial media (instead of logarithmic percent-change versions) may give the wrong impression. It’s not the whole story by a wide margin.

Stock market update

In my opinion, we are not in a stock market bubble. We are not at the point when another breath will cause the whole thing to burst.

Compare today to the market in 2000. Stocks then had been rallying for 12 1/2 years, not 8 1/2, as is the case today. The gains amounted to close to 600% back then. Today we are at 277%. Volatility was rising. Today it is low and falling.

Price-earnings measures of stock market value were at a breathtaking level of over 30. Today we are barely over 20. Some indicators were warning of a recession back then, while few are today.

Rising earnings, economic-indicator strength, and low interest rates are the case today. These are not normally the cause of a bubble bursting.

Companies’ forward projections included in their earnings reports were the highest in years last quarter. The ISM manufacturing and nonmanufacturing (service) industry surveys reported last week were the best since the current rally began in 2009. And while the Federal Reserve seems more and more likely to raise interest rates in December, past rate hikes of the current cycle, coming from such a low level, have not dented the stock market rally.

I continue to be sanguine about the intermediate- to longer-term future of the stock market, but its immediate future is more problematic. There is no doubt that while the market has just experienced a breakout from its latest respite, the fact that stock indexes have registered new all-time highs almost every day for the last two weeks does have the contrarian in me concerned.

Looking at the following chart, it is clear that we are in uncharted waters. But it is equally apparent that we are very overbought. In other words, we have gone up faster and higher than normal, leading me to expect a reversion to more sustainable rates of growth.

S&P 500: Last Year

But I expect this is a short-term phenomenon. In rising to these levels, stocks have paused many times, but the pauses have not been painful.

It has now been 3,132 days since a 20% decline and 465 days since even a 5% setback. We haven’t had a 3% dip for over a year! In a little over a month, we may set a record for the longest period ever for such conditions.

Yet, we are definitely overdue for a correction. And it will probably be more than 3% this time.

But the important fact to realize is that the precursors of something sharper, of a bubble-bursting decline, are not in evidence.

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