Control Panel: WSJ & NYT articles about bubble market

Often, articles in the mainstream financial press are contrarian indicators. Both the WSJ and NYT published articles about how to invest in a bubble market this week.

But is the stock market really in a bubble? Of course not! This time is different! Nothing like past bubbles! Vital bubble ingredients are missing…I guess like yeast in bread dough, right?

A Frothy Market Misses Vital Bubble Ingredients

Measures of investor sentiment are positive, but nothing like past bubbles

By James Mackintosh, The Wall Street Journal, March 2, 2024

But is it a bubble? There’s no single definition of a market bubble, but for me it has to involve a speculative mania. It’s when buyers en masse cross the line from assessing future profit potential to buying something they know is unreasonably expensive—or just don’t care about the price at all—because they think a greater fool will buy it off them at an even higher price…

Measures of investor sentiment show they are positive, but nothing like past bubbles. One example: The weekly survey by the American Association of Individual Investors shows 47% declare themselves bullish, low compared with the 75% declaring themselves bullish in 2000, or even the 60% in early 2018.

Money isn’t flooding into the market, leverage isn’t being used to boost investments, and so companies aren’t forming especially to tap a gusher of speculative cash… [end quote]

The SPAC insanity of 2021, which was precisely due to forming companies with zero-interest money, faded when the Fed raised interest rates.

Margin debt, which correlates closely with the SPX, has been rising but was stable in January. The February number isn’t available yet.

The strong bull market in the stock indices continued last week. The SPX and NAZ hit all time highs. New highs minus new lows were strong and trending upward. VIX was low. The Fear & Greed Index was in Extreme Greed. Bullish percent has been declining since the start of 2024 but it’s still pretty strong.

CAPE is near its bubble high and rising.

Treasury yields, which have been rising recently, fell slightly last week. The trade is risk-on as stock prices are rising faster than Treasury prices. USD is stable.

Gold suddenly popped on high volume. It’s now at the top of its stable channel established in December 2023. Only time will tell whether the price will fall back into its channel or break out into a new high.

Oil is also at the top of its channel. Natgas rose a touch but is still near its multi-year low.

Financial stress is very low despite the Fed’s rate raising campaign. There’s plenty of money supplying the market’s demand. M2 has stabilized below but near its record high. M2V has been rising as the economy grows.

PCE inflation came in close to the Fed’s target of 2%. The Fed announced many months ago that they intend to continue their increased fed funds rate until inflation has met their target for “an extended period” of time which means several months. But it’s likely that they will cut, as the market expects, if the economy slows. There’s no real need to cut if inflation is stable, the job market is stable and the economy is growing at a sustainable pace as is true now.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 was 2.1 percent on March 1, down from 3.0 percent on February 29. While this is a respectable growth rate it does indicate a potentially slowing economy.

The options market predicts the first quarter-percent Fed rate cut in June. By December, the options market centers on a full percent reduction in the fed funds rate, from 5.25% - 5.5% to 4.25% - 4.5%. The one-year inflation expectation is 2.4% so that would be a 2% real yield. That’s in line with historic yields. This is reasonable although it’s not the negative real yield that the markets became addicted to due to Fed money pumping.

There are no significant market-moving news stories at this time. Nothing to burst the bubble.

The METAR for next week is sunny.


The DXY (The US dollar index - DXY | U.S. Dollar Index (DXY) Advanced Charts | MarketWatch ) is currently plateauing over 104, higher than it has at any time since the period after 2000 and during the 1980’s.

As the US dollar moves higher, the value of foreign sales and profit decline in terms of USD, which tends to drive equities lower. Apparently the direct link has been broken, which I am interpreting as the spring is being wound. If the DXY continues to rise, when the spring lets loose, it’s bound to get messy.



Ray Dalio on whether we are in a bubble. TLDR, we are likely not in a bubble.


So, when does the bubble bust and how low does it go? I’ve noticed over the years that indicators are always unreliable. Not false. Just unreliable. The market can be “bubbly” by one indicator but not by others. Some will swear everything’s OK, except one person who will point to (name of indicator) and then claim credit for being right when there is a correction. Not even a crash of any significance.

In 2000 the PE ratio was blooming obvious. In 2008 it was not so bad but we had an even worse crash. And ultimately there have only been maybe half a dozen crashes that mattered in the last 100 years, Everything else we had been “warned about” was relative peanuts.

I think we are due for some sort of set-back here. The chart looks spiky to everybody who isn’t lying about it. 2000? 2008? 1973? Wait 5 -10-15 years to break even? It’ll probably be a dull Summer with a correction of some kind and some election news hand wringing. Take some air out of the ball then proceed.

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I am accusing James Mackintosh of being an AI bot. LMAO

A bubble is a bubble only if it pops. If it never pops it wasn’t a bubble but a bull run.

The above has implications, you can’t tell a bubble from looking at it coming, only by looking at it after it’s gone. That does not mean you can’t have opinions about it but opinions are not facts. By the time bubbles reveal themselves there is nothing you can do about them unless you have a time machine.

How does one bubble-proof a portfolio? By buying stocks that bounce back. How do you know it will bounce back? It has a solid business to support it. Another is to use the Kelly Criterion, diversify to the max, don’t buy individual stocks, buy index funds.

Of the three main indexes, DJIA, SPX, and COMP, I’d bet on the NASDAQ

Dollar cost average long enough and you can’t lose.

The Captain



I believe that chart starts in the 1980s.

Dollar-cost investing in the 80s, 90s, oughts into 2015 was not a good game. If the buyer died in 2015 after investing for the entire 30-year period it would not be that productive.

It is a bit like the guy I know who has saved $500k worth of Coke memorabilia. He is over 70 years old now and will never sell his collection. He lives in squalor.

Which is curious. China still has a real estate crisis. Much of Europe is in or near recession. The U.S. government is once again a week away from a shutdown. Cargo ships are getting hit by missiles in the Red Sea.

It appears that the US economy has somehow insulated itself from the rest of the world.

How much of this PE bubble is due to the Magnificent Seven? Back in January the average PE of S&P companies not including the Seven was about 15 (compared to a mean of 35 for the Seven). I’ve heard that the historical average for the S&P is about 19.

If this is a bubble, it seems to be a pretty shallow one.


The equal weight S&P index (ticket RSP if you want to invest) indeed has a P/E of about 15, so the bubbly stuff seems to be concentrated near the top.

But then again if the buyer died in 2015 after investing for the entire 30-year period, it would not matter to them at all. :coffin:


The point about dying between 2008 and 2015 after that run is that the heirs did not get the better results that could have been had.

I could restate that as 2002 to 2015.

@syke6 @btresist you make a good point.

But consider this.

While index funds held 16% of the US stock market in 2021, a Harvard Business School paper put the true passive-ownership share at 33.3%.

If the vulnerable “Magnificent Seven” bubble breaks the indexes will be smacked down. These stocks make up about 30% of the S&P 500’s total weighting, although they make up just 1.6% of the stocks in the index.

Given the heavy weighting in the index and the heavy ownership of passive index funds the entire market could be dragged down. Not to mention margin calls which often cause market downdrafts to propagate.



I agree. However, if the bubble is localized to the Magnificent Seven, then an equal weight index like the RSP is probably fairly valued (as it appears to be based on historical data). In fact, it might be undervalued if there really is an AI mania that has irrationally pulled money out of non-AI stocks.

This means that a broad market collapse due to a bursting of the Magnificent Seven bubble would make the RSP substantially undervalued historically and therefore a good investment.

The RSP has been flat since 2022, approximately corresponding to the time when the Magnificent Seven started to become a thing. If the Seven fall, the RSP may rise, as it had been doing prior to 2022.


In other words, one could say that the star is where the RSP should be today if Seven-mania had not attracted all the investment dollars. If a bubble burst drops RSP below 150, it might make it a screaming good buy.


That’s likely the case. I view the market a bit differently than many METARs in that I don’t try to jump and out in order to avoid bubbles.

I view a market with higher than typical valuations will be likely to have lower than typical returns going. I’ve been watching the valuations grow at the top and been slowing shifting towards mid and small caps. That has cost me some performance, but I agree with @btresist there seems to be good value there. I also have a decent slug of BRK.B, which is expensive at the moment and unlikely to outperform, but is built for economic downturns.

Even if that is all wrong, it might be wise to move out of the cap weight index just for diversity reasons. 30% of the portfolio is Big Tech.

That said, if you believe that theory that average P/E has some predictive value (and I’m not entirely sure I do), here are some average P/Es of some stocks over about the last 12 years:

Ticker Current P/E Average Difference
GOOG 25.6 28.8 -3.2
MSFT 36.3 28.2 8.1
AAPL 26.8 18.6 8.2
META 43 41.9 1.1
AMZN 63.4 159 -95.6

Maybe not as frothy as we thought. Who knows?


Just my thing, I have my own ideas, but this market will correct or call it seasonality.

Today’s action may have been very telling.

With yield spreads against inflation increasing equity values fall. Inflation was profitable. It is disappearing.

Ray Dalio has a piece that explains why the six criteria he looks at when deciding if a stock market is in a bubble lead him to believe the U.S. isn’t in a bubble yet. The piece is full of great charts.