Polling numbers: Why there may be bubble trouble ahead

Data crunching by industry analysts suggests the latest market bubble is likely to burst shortly after the next US presidential election, warns Christopher Adams, Markets Editor at the Financial Times. We highlight the key numbers behind the gloomy forecast

Six. The number of years that US stock market trading is into a bull run. The market has been trading at record highs and the B-word has returned to investors’ lips. For some, the exuberance has become symptomatic of a bubble, stoked by an assumption that central bankers, who by way of quantitative easing have encouraged investors to pour money into risky assets, are ready to support falling markets.

300. The number of market bubbles (both major and minor) that veteran fund manager GMO has crunched the data on in over 88 years. According to GMO’s Jeremy Grantham, today’s market conditions mean we are headed for a correction in the not-too-distant future. GMO draws on research by John Hussman, who argues that US markets were overpriced by between 75%-125% at the end of March. He writes that GMO “very much agrees with the spirit of this data, but our preferred measure for our seven-year forecast has the market slightly less overvalued at 65%.”

2,250. The amount that the S&P would need to rise to from current levels for the US stock market to get to what Grantham calls a two-sigma event, which is akin to the US stocks bubble before the plunge of 2008. This is within reach, given that the driving force behind recent bubbles has been the Greenspan Put, the market-friendly approach of former Federal Reserve Chairman Alan Greenspan.

2016. The year of the next US presidential election. Grantham, taking account of how markets move with political cycles, predicts that stocks are likely to rise at least until the election in November of that year. History shows, he says, that strong gains tend to come in the third year of the presidential cycle. So from October this year until April 2015, the market is likely to be strong, the S&P perhaps even rallying past the 2,250 level in the following 18 months up to the election. “And then, around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half its peak or worse, depending on what new ammunition the Fed can dig up,” he forecasts.

2000. The year of the stock market bubble that, according to Grantham, was caused by the ‘this time is different’ mentality of the dotcom boom. His colleague at GMO, Edward Chancellor, defines this mindset as one of the typical characteristics of stock market mania. That same thinking, he says, is evident today among those who believe US profit margins, now at peak levels, have reached a permanent plateau. For good measure, he throws in some other defining characteristics. These include easy money, overblown growth stories, conspicuous consumption and Ponzi finance.

13%. The percentage the S&P gained in 2010. Birinyi Associates has reviewed more than 300 pages of news headlines from that year. Headlines from the first quarter include: “Bull looks long in the tooth” and “The markets have good reasons to be nervous”. Looking back, the headlines demonstrate that just because people say the stock market is overvalued, it does not mean a correction lies ahead.

This is an edited version of an article written by Christopher Adams that originally appeared in the June 2014 print edition of the Review
Published: 21 Aug 2014
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