Now that we are eight years into a bull market, some investors just assume something must go wrong. As a result, we see lots of stories and get lots of questions about “bubbles.”
“So what market or sector is in a bubble already?”
Auto sales have been declining lately. In eight of the last nine months (but we only have data through April), US sales of cars and light trucks have been lower than the same month in the prior year.
So does this mean auto sales is in a bubble?
This must mean that the auto sector is about to burst or is bursting, right?
The real story is much more benign. Fundamentals, like driving-age population growth and scrappage rates will suggest that the auto sector should sell at about a 15.5 million annual rate. Sales were below that level in 2008-12 (five straight years!). Part of that problem was due to the recession in 2008-09, but sales were unusually slow in 2010-12. With that, we see the above-trend pace of sales in 2014-16 as “catch up” so this means that we expect sales to gradually slow back down to a 15.5 million pace from 2017 and on. That is not a bubble; it’s just the end of the catch-up period as consumers will just buy other items instead of cars.
Another claim is around home prices, but using a price-to-rent ratio, national average prices are very close to the long-term norm relative to rents. (We use asset values generated by the Federal Reserve and rent prices generated by the Commerce Department’s GDP statisticians.) Regardless, home builders need to pick up the pace of construction or home prices and rents will accelerate. Yes, household debts are at a new record high, but household debts relative to assets are at one of the lowest points since 1990.
Next, is there a bubble in student loans?
We think many students are paying too much for college whether they’re paying for it with loans or up front. So, yes, in a sense that’s a bubble, but it’s one directly caused by government policy which will saddle some students with debts they have trouble repaying and potentially taxpayers with larger budget deficits. The positive, if there is one, is that much of the loans run through federal lending so defaults aren’t going to bring down the financial system.
Lastly and the most common question we hear: Are stocks broadly overvalued? My answer: No and here is why: Our capitalized profits model, which uses economy-wide profits, suggests the bull market has further to run even if interest rates move up substantially. In December, we forecasted the S&P would hit 2,700 by year-end 2017. A roughly 21% gain for 2017 seemed ambitious to many investors back then, but as of Friday’s close, we’re less than 12% away. In closing, eight years into the bull market and the only plausible bubble we see is that bonds are still too pricey and so with all the talk of bubbles, I just don’t see “no stinkin bubble” in 2017.