Are We in a Bubble?

The year 2017 has been very good for the markets overall. Some pundits say that the gains were driven by anticipation of the tax cuts. Indeed, corporate tax cuts will definitely result in an increase in company earnings. Now that the tax package is passed, the $64 trillion dollar question, of course, is whether the tax reform is already priced into the market.

Overall, stocks appear expensive based on historical PE rations, but that has been the case for the last couple of years. Bulls point out that this is justified because, bonds, a traditional competition to stocks, are not attractive due to low interest rates. The condition of international markets also appear benign, with European Union reporting good growth. U.S. dollar is declining which is good for U.S. international corporations.

After a strong 2017, and last several years as well, sometimes am I asked whether the market is in bubble similar to that of 2000. I believe that there is very little resemblance to the conditions then. While there are companies with very high traditional valuations now, these companies have strongly growing earnings and revenues. In 2000, many companies had no revenues. Today, market leaders, including tech bellwethers, such as Apple, Google and Facebook, actually have reasonable valuation metrics. Finally, there is no euphoria — one doesn’t hear hot stock tips from taxi (or Uber nowadays) drivers. However, my mother-in-law asked me whether she should invest in bitcoin. So, if you want to worry about a bubble, you can legitimately worry about one in cryptocurrencies. The estimated earnings from bitcoin are exactly zero. We will continue to invest in what we know works and stick with quality companies with good earning growth.