MARKET SNAP: At 5:55 a.m. ET, S&P 500 futures down 0.1%. 10-Year Treasury yield flat at 2.69%. Nymex down 40 cents at $102.93. Gold 0.1% lower at $1334.20. In Europe, FTSE 100 down 0.4%, DAX 0.2% and CAC 40 down 0.3%. In Asia, Nikkei 225 up 1.2% and Hang Seng down 0.3%.
WATCH FOR: February ADP Jobs Survey (8:15 a.m. Eastern Time): seen +160K; previously 175K. February ISM Non-Manufacturing PMI (10:00): seen 53.5; previously 54. Federal Reserve’s Beige Book (2:00). Brown-Forman, Canadian Solar, Houghton Mifflin, Hovnanian, PetSmart and Walgreen (monthly) are among companies scheduled to report quarterly results.
THE BREAKFAST BRIEFING
That didn’t last long.
Just as the S&P 500 reclaimed record highs amid an easing of geopolitical tensions in Eastern Europe, a familiar debate resurfaced: Have stocks reached bubble territory?
U.S. stocks stormed back Tuesday with the best performance of the year, reclaiming all of Monday’s Ukraine-induced selloff. The S&P 500 set a fresh new high, its fourth of the year and 48th over the past 12 months. The stock index is now up 173% from the March 2009 bottom, making the current rally the second-best-performing bull market over a five-year time horizon since World War II, according to LPL Financial.
The S&P 500 is trading at roughly 15.5 times next year’s earnings estimates, according to FactSet. That’s above both the five-year average of 13.1 and the 10-year average of 13.9.
Stock valuations aren’t the only signs of frothiness in the market. Margin-debt levels keep hitting record after record, shares of recently public companies have been big winners this year and momentum stocks, like Facebook Inc. and Tesla Motors Inc., keep flying high.
Add it up and market watchers are increasingly pointing to signs of a bubble.
“Today is very similar to that of the second half of the 1990s, when the equity bull market in the U.S. turned parabolic,” Chen Zhao, managing editor and chief strategist at Canadian research firm BCA Research, wrote to clients last week. “If this is the right call, it means that both stocks and price volatility could rise sharply in the coming months, if not years.”
Mr. Zhao is quick to note that market valuations are “much more reasonable and rational” than they were during the dot-com bubble. But they’re also moving closer to bubbly levels.
“Asset bubbles can form within a rather short period, and they often first build on a few exciting sectors that capture investors’ imagination,” Mr. Zhao said. “Only over time does mass participation start to propel overall asset prices to very overvalued levels. In all likelihood, there are increasing odds that the U.S. stock market will march toward a much bubblier environment,” he said.
The S&P 500 has surged 7.5% from last month’s low and finished Tuesday at 1873.91.
With stocks at record levels, investors borrowed another record amount against their brokerage accounts in January. So-called margin debt rose for a seventh straight month to $451 billion in January, up more than 20% over the past year, the New York Stock Exchange said this week. The Big Board’s member brokerage firms report the level of borrowing held against client accounts monthly.
Some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks. Previous peaks in margin debt coincided with market tops in 2000 and 2007.
“Another sign of a Fed-created bubble,” said Andrew Brenner, head of international fixed income at National Alliance Capital Markets, referring to the Federal Reserve’s accommodative policies and their impact on the markets. “They continue to add up.”
To be sure, not everyone is convinced the markets have entered bubble territory. Some of the highflying sectors, like social media and cloud computing, still have room to continue moving higher, the bulls say.
“We get why investors want to sniff out this bubble the day before everyone else and become rich and famous. That sounds awesome,” Morgan Stanley strategist Adam Parker wrote in a note to clients Monday. “But, the truth is, portfolio managers typically want exposure to growth, and when you scan the list of the top ten fastest revenue growth industries in the market in the next two years, Internet and catalog retail and Internet software and services are prominent among them.”
As a result, “having some exposure to trends like big data and analytics, social, mobile, etc., does seem prudent,” Mr. Parker said.
Even so, investors would be wise not to get too complacent about current bubble warnings.
“All bull markets are born in pessimism, grow in skepticism and die in euphoria,” said Mr. Zhao of BCA Research. “We are not yet at the euphoric stage, but a better world economy, stronger profitability and continued policy exacerbations are potent ingredients for the fomenting of another asset bubble.”
Morning MoneyBeat Daily Factoid: On this day in 2004, Martha Stewart was convicted in connection with her controversial sale of shares of ImClone Systems Inc. She unloaded shares of the biotech company right before the stock price tanked.
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