“Good mashed potato is one of the great luxuries of life.”
-Lindsey Bareham
Here’s what you need to know this week:
- Stocks sink due to a mixed unemployment report
- Fears of a market “bubble” may be overblown
Wild Ride Continues
Stocks continued to fall last week on lingering uncertainty surround economic data. The delayed US nonfarm payrolls (NFP) report for the month of September showed the economy adding 119,000 jobs, higher than the 56,000 that analysts expected; however, the report also showed unemployment rising to 4.4%, the highest level since the pandemic[1]. This mixed bag of a report, combined with announcements that upcoming inflation and jobs reports will be similarly delayed, sent stocks to their lowest point since mid-September.
The whole week wasn’t a loss however, and Friday brought investors additional reason to be optimistic. The reason markets react so negatively to these murky economic reports is that the lack of data may cause the Federal Reserve to forgo an interest rate cut at their next meeting on December 10th. Federal Reserve Vice Chairman John Williams and Fed Governor Stephan Miran both gave public remarks on Friday and indicated support for a rate cut in December, sending stocks upwards and dramatically increasing the odds of a rate cut[2].
As of writing, the bond market is assigning a 77% chance of a rate cut next month, up dramatically from the 42% odds last week[3]. Markets rose 1.6% on Friday and finished the week just 3.9% off the record highs last set on October 29th[4]. This tempered optimism is a healthy market reaction to uncertainty and may provide evidence that markets are not in an irrational “bubble”.
Bull or Bubble?
Everyone is familiar with the concept of a market bubble: periods of time where investors become irrationally optimistic, driving prices unreasonably high and setting markets up for an inevitable fall. The last bear market (stock prices fall at least 20%) bottomed on October 13th, 2022, and since then stocks have been in a general uptrend, known as a bull market. After three years of strong gains combined with the immense hype surrounding developments in artificial intelligence, many are wondering whether this bull market is turning into a bubble.
While it is always possible that markets go lower, current data indicates that no, we are not (yet) in a bubble. Let’s compare to the dot-com bubble, the most famous bubble in history. The dot-com bubble was full of companies making grand promises and being valued at billions of dollars despite low (or even *no*) revenue. Today’s companies are different; most of the winners of this A.I. cycle are large, established companies with billions of dollars in revenue.
A handy method of valuing companies is the P/E Ratio, which takes the price of a company’s stock and divides it by the earnings per share that the company generates. If we look at the aggregate P/E ratio of the S&P 500, we can see that the ratio is the same as it was at the start of the year:
What does this mean? The average S&P 500 company has grown their earnings by 12.6% this year, and guess how much the S&P 500 is up? 12.6%. In other words, 100% of gains in the S&P 500 have come from earnings growth, not “irrational exuberance”.
Next, let’s look at our current bull market side-by-side with the dot-com bubble. While our current bull market has provided impressive returns over the last 36 months, it pales in comparison to the run in the 90s:
As you can see, today’s market would have to run much hotter to contend with the dot-com bubble. Another feature of bubbles (and bull markets) is that they can run much longer than anyone thinks. Back during the 1990s, plenty of people were warning that stocks were in a massive bubble. One of the most outspoken critics was the Chairman of the Federal Reserve, Alan Greenspan. Greenspan correctly identified the bubble and called the market spike “irrational exuberance”, words that are now famous among investors. Great call right? Well:
Greenspan said this in 1996, more than three years before the bubble finally popped. As famed economist John Maynard Keynes said, “markets can remain irrational longer than you can remain solvent”. Here’s the most interesting detail though: when the bubble finally popped and stocks plummeted, the absolute bottom price for the S&P 500 was higher than on the day Greenspan made his “irrational exuberance” comments[5]. Isn’t that incredible? If you moved to cash the day the Chair of the Federal Reserve declared a bubble and waited until the exact bottom of the selloff, you still would have underperformed an investor who just held on. As Mellody Hobson said: “The biggest risk of all is not taking one”.
No one can predict the future. I don’t know if stocks will rise or fall tomorrow, and I don’t know if this current market will turn into a bubble; what I do know is that current data says we are *not* in a bubble. More importantly, as I’ve said ad nauseum in this newsletter, the best long-term strategy is to buy and hold, tune out the distractions and fluctuations, don’t panic and stay focused on your long-term goals.
What Else
- Ukrainian President Volodymyr Zelenskyy expressed disdain with a peace plan proposed by the US that he claims favors Russia
- The Israeli military is firing and disciplining more than a dozen senior officials for failures related to Hamas’ attack on October 7th, 2023
- President Trump announced that the Cartel de los Soles of Venezuela will be designated as a terror organization, including Venezuelan President Nicolas Maduro
- OU defeated #17 ranked Missouri 17-6, further building their case for a College Football Playoff bid
- US markets will be closed this Thursday in observance of Thanksgiving
What We’re Reading
Continuing last week’s theme of studying animal migration patterns, scientists believe they have found the so-called “compass” organ that allows birds to migrate thousands of miles with precise accuracy. A combination of brain mapping and RNA sequencing has led researchers to believe birds can sense the Earth’s magnetic field in a small part of their inner ear. Click below to learn more about this discovery and what else scientists hope to learn from this breakthrough:
What’s Happening Downtown
The Holiday Pop-Up Shops return to Midtown this Friday, November 28th. The outdoor marketplace will be open every Friday-Sunday from now until Christmas and features tents from dozens of local vendors. Click below to learn more:
To read more from our blog, click here
Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, CFP®, Brandon Ingerson, Bill Daniel, Sam Postich, Jenni Hess
Sources: [1] Reuters [2] Yahoo! Finance [3] CME Group [4] TKer [5] A Wealth of Common Sense