Friday, April 3, 2015

Stocks bubble?

Finnish Financial Supervisory Authority (Finanssivalvonta) warned recently that "financial sector participants must refrain from excessive risk taking in their search for yield. We should also be prepared for a bursting of a possible asset price bubble.".

This fueled the ongoing "stocks are in bubble" discussion in the media.

Well, I'm not going to start guessing near term directions of stock market. Instead, I think people too easily use the word "bubble". Many of us participated in the turn-of-the-millenium IT bubble so we know what a bubble looks like.

There are crazy valuations out there, but stock market overall is not in the bubble. US and European stock prices have gone up over last few years considerably.

On the other hand, we are in an environment where there really is no "sure" inflation protection available. Central banks in US and Europe have slashed the interest rates to near zero if not negative (according to some news stories even individuals might get loan with negative interest rate!).

In that kind of environment stocks that yield 3-6% look good and it's only natural money flows to higher yielding asset classes.

According to data that I have available (via Valuatum), the median yield expectation for 2015 for Finnish stocks is 3,5%. This means half yield more than this.

There are stocks where price-per-earnings (P/E) ratios are clearly too high (for me P/E beyond 20 is expensive unless company is growing and that is expected to continue). Median P/E estimate for Finnish stocks in 2015 is 16,5. Meaning half of them are below that.

My conclusion is that many stocks have rallied probably too high, but the market overall is not in a bubble.

Corrections might happen, though, even big ones.
For long term investors like me they only provide opportunities to buy more those stocks that are still reasonable priced.

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