Last week stock market bubble-mania was rampant. It seemed as though every Wall Street website, network, magazine, TV show, pundit, talking head, you name it, was screaming that the market had hit rarefied air and we were in a bubble the likes of the tech world at the end of the last century. They also warned that a crash could be sizable and was imminent.
For some background information, from the closing low of the market on March 9, 2009, at 676.53 on the S&P 500 to the recent closing high of 1,985, the market has risen an astonishing 193%. An incredible feat to say the least. However, much of that number was just filling in the huge hole we dug on the way to 676 in 2008 and 2009. Twice, in 2000 and in 2007, the S&P 500 approached the 1,600 level on the index, only to fall back and fall hard. When we finally broke out above the 1,600 level in May of last year, we officially entered into a secular bull market.
There are numerous reasons for the strong rally. First stocks were just too darn cheap to ignore. Many top tech, bank, auto and housing stocks were trading in the single digits. Interest rates were lowered and kept at levels not seen since the 1950s, and they are still there, with both the 10-year and 30-year Treasury debt hitting yield lows not seen since last summer. Lastly, the economy finally started to roll again, and companies started to deleverage and show outstanding earnings growth as the U.S. and global consumer finally started to spend again.
So are we really in a bubble? Will there be a mammoth stock sell-off of 30% or more? A new equity strategy report from the top-notch team at Deutsche Bank says the answer is probably no, despite the fact that a fall correction is a possibility. In fact, they say that unless the August 1 jobs report brings an uptick in U.S. labor force participation, they are likely to maintain a tactically cautious stance heading into autumn. Midterm election years have often seen selling prior to the election.
With that in mind, the Deutsche Bank analysts are very positive on the possibility of the S&P topping the 2,000 mark, and they feel that on a total 2015 earnings of $125 for the index members, a 16 EPS multiple would be tacked on. From a historical standpoint that is not unheard of. In fact, from 1960 to 2013 the S&P traded at an average of 16 times earnings. From 1985 to 2013, it traded even higher at 17.6 times earnings.