Are We in an Equity Market Bubble?

In the last few weeks we have heard a lot of noise from different newspapers and television programs saying that we are in a big equity bubble. Honestly, I don’t see it. It’s been almost two years since we’ve had any meaningful correction, and we can’t rule out the possibility of one in the future. However, I don’t think we are in a bubble.

The market is trading at roughly 17-17.5x 2013 earnings. It seems to me that the multiples are within the historical ranges, despite a world with no inflation and historically low interest rates. I don’t think this market is cheap, but to call it expensive is really a stretch. In 2000, our last equity bubble, the market was trading at 60x trailing earnings.

Investors Should Keep Focusing on Equities 

Large-cap stocks are especially attractive. Mid-cap and small-cap are a little bit more expensive – in some cases quite a bit more. However, that has been the case for the last few years. So not only do I see a lack of valuation bubble in the market, I still think that, with very little wage growth, we may see multiples continue to expand if GDP is growing at 2.5 – 3%.

I believe 2014 will be another year in which investors should consider increasing their equity exposure. I think any correction will be a good opportunity to invest in this market, where many investors have missed out. Usually, when we see a big bubble, it’s because valuations are very stretched and everybody’s in the market.

So I think that those pundits who are calling this market a bubble are really missing the big picture here. And I think investors should keep focusing on equities because they will continue to deliver better results than fixed income.

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