Historical Market Comparisons Are Meaningless

As Chief Strategist for 
STA Wealth Management I start each and every day by consuming copious amounts of a heavily caffeinated beverage and a data feed from a litany of web and blog sites. Over the last couple of days in particular, they have been numerous articles on whether the market is currently in a bubble.   Here are a few as an example that I just grabbed from realclearmarkets.com:

Is This a Bubble Market? There’s One Way to Tell

Is Financial Media Warding Off Stock ‘Bubble’?

The Upside of Speculative Market ‘Bubbles’

Yellen: Bubbles? What Bubbles?

Well, you get the idea. First of all, bubbles only occur when no one is looking for them. Bubbles form when greed runs rampant and there is a mass hypnotic state that the current ride will never end. The shear fact that multitudes of articles are being written about “market bubbles” is a sign that we are likely not there, yet. (Read: Too Much Bubble Talk)

However, as a shot of caffeine hits my brain, I read with interest a recent piece on Bloomberg entitled “5 Reasons We’re Not In a 2000 Bubble Redux.” which I have summarized for you:

1) Volume of IPO’s is less than half of the first quarter of 2000

2) First-day returns of IPO’s are just 1/5th of the first 1st quarter of 2000.

3) Speculative companies carried a 43% higher valuation to dividend paying companies in 2000 versus just 26% today.

4) Cash derived from equity issuance was 20% in 2000 versus just 11% today.

5) Share turnover in 2000 was an annualized 89% rate versus 58% today.

While these are certainly some interesting arguments, the comparison between now and the turn of the century peak is virtually meaningless. Why? Because no two major market peaks (speculative bubble or otherwise) have ever been the same. Let me explain.

In late October of 2007, I gave a seminar to about 300 investors discussing why I believed that we were rapidly approaching the end of the bull market and that 2008 would likely be bad, really bad. Part of that discussion focused on market bubbles and what caused them.  The following two slides are from that presentation: