If you’re keeping up with Donald Trump — or, more importantly, analysts’ predictions — we’re in (or heading toward) a stock bubble.
It’s just a matter of when.
Stocks are currently trading at near record highs. In fact, stock prices have nearly tripled since 2009.
Are Trump and the analysts right?
Let’s take a look…
What is a Stock Bubble?
A stock bubble occurs when an asset, stock, or commodity rises far above and beyond fair market value.
When investors place high demand on a stock, the prices go up.
When prices are pushed too far up, they exceed the actual value of a stock.
Think of it this way: a bubble can rise only so high before the inevitable burst.
Stocks, in kind, react the same way, right?
Maybe. Maybe not.
The Market is Good… Right Now
Currently, overly confident investors are wrapped in the security of the top indices.
Times are looking good if you look solely at the numbers.
The NASDAQ (IXIC) is up a whopping 275% when compared to 2009. The S&P 500 (INX) has risen more than 210%, while the NYSE Composite (NYA) is up 165%.
What could possibly go wrong?
Are We or Are We Not In a Bubble?
Trump, like many prominent investors, staunchly declares we’re in a bubble right now.
He thinks that investors will eventually lose money because the stock market is currently inflated.
If his prediction holds true, people should brace themselves to lose a lot of green.
Nobel Prize winner and economist Robert Schiller agrees. He thinks a bear market is on the horizon.
Schiller explains that our current market looks like a bubble because stock prices have essentially tripled since 2009. He says investor worry is evident in his investor confidence indexes.
People are wringing their hands, waiting for the bubble to burst.
However, Michael Gurka, founder and president of investment management company BruinHill Partners, doesn’t believe that we are in a bubble. He told CNBC he believes that prices must rise much higher before we can call it a stock bubble.
So, what’s the verdict?
Can We Really Predict a Stock Bubble?
Let’s get real. It’s difficult to predict a bubble with any degree of certainty.
The only way to truly define it is in retrospect.
The best we can do is look back in the past to other stock bubbles.
Even so, those who claim the ability to predict a bubble, as well as a crash, may be shaking the hand of Lady Luck for his or her spot-on prediction.
But wait…. here’s an interesting fact to consider.
Two decades ago, the word “bubble” didn’t exist—at least not in economic textbooks.
On top of that, the most seasoned analysts can’t even agree on whether or not we’re in a bubble.
Eugene Farma — who shared the Nobel Prize with Schiller — doesn’t believe that a stock market can be predicted. In fact, he doesn’t think bubbles even exist.
His research in the 60s and 70s showed that not only is it difficult to beat the market, but it’s also difficult to predict the market, as well.
So, are we in a bubble?
Only time can tell.
At the end of the trading day, it’s up to you to make a market decision based on your comfort level.
This post originally appeared in mainstreetinvestor.com.
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