Is the Stockmarket in a bubble?

cepheus

It seems strange seeing the stock-market posting new highs whilst the UK recovery is still fragile. Neither can we dismiss it as foreign influence with the FTSE250 making new highs, and performing even better than the more international FTSE100.



Is this an equity bubble caused by quantitative easing, low interest rates and subsequent poor returns on bonds, or a genuine prediction of a recovery? What happens if this QE fuel stops?

ermine

Companies are doing reasonably well. It is part of the general shift of economic power towards capital and away from labour, caused by the increase in the global workforce reducing unit labour costs among other things.

So it won't feel that great to the UK man in the street any time real soon now, and probably will be associated with an increase in inequality of wealth.

QE and the falling value of the pound has probably contributed about 20% to that however. Equities are a stake in real income producing companies, so if the currency is debased, the value of some of that increases, particularly as the FTSE100 is well diversified internationally with a lot of the income coming from abroad.

Hope you were buying in 2009, and in the Summer of Rage in 2011

cepheus

ermine wrote: »

QE and the falling value of the pound has probably contributed about 20% to that however. Equities are a stake in real income producing companies, so if the currency is debased, the value of some of that increases, particularly as the FTSE100 is well diversified internationally with a lot of the income coming from abroad.

That's why I quoted the 250 which is doing far better than the 100 and is less exposed to foreign investment and therefore currency devaluation effects. It's almost as if the rich don't know what to do with their money due to low rates.

talexuser

I can't help feeling the economic fundamentals don't support this, feels more like a bubble fuelled by cheap government credit trying to keep the previous bubble afloat.

atush

I think there is a bubble in gilts and bonds.

brasso

The torrent of people on here over recent months saying "I'm fed up with not earning anything on my savings, I want to try investing in shares" gives a bit of a clue too.

merlingrey

No if it was a bubble people would not think it was going to crash, currently everybody seems to think it is a bubble which ironically is the opposite of what bubbles are like.

In a true bubble you would see a few things different, for one thing i'd not expect gold to be rising or staying steady i'd expect gold to be at new lows not near all time highs since everybody would be selling gold to buy stocks.
You might see that reflected in bonds also where bonds are sold down to buy stocks.

I also would not expect to see people act negatively to any rise, people would actually use the rise as an excuse to buy more and eventually people would come to believe stocks only go up and even start to margin (borrow) against stocks to maximise returns.

Theres no bubble psychology at play BUT it could be like that 5-10 years down the line.

jimjames

merlingrey wrote: »

No if it was a bubble people would not think it was going to crash, currently everybody seems to think it is a bubble which ironically is the opposite of what bubbles are like.

Totally agree.

If anything it is the opposite of a bubble when you see the number of forum threads "the market is too high I'm not investing now" and in a bubble everyone thinks it is a surefire one way bet which definitely isn't the case at present.

In a bubble you'd be jumping in now to make the profit before it rises further so with everyone expecting it to be lower in future that clearly isn't a bubble.

ccbrowning

People have been asking this since last November or even longer, but look how much you'd be down if you jumped out then...

The conditions seem different than before the last crashes, but I think we're due for a period of volatility so will just be feeding money into S&S each month. Not that any of us know anything about what the future holds, of course.

mark55man

One commentator I liked said

QE is not driving the stock market (ie no conspiracy govt and banks)

QE is driving easy money easy investment providing benign environment for business - which is performing well and that is driving the stock market

if QE stops the benign environment stops and hence business will struggle and then we will (may) see a bit more of a drop.

My bet - the day QE is officially withdrawn (don't hold your breath) everything will tank, and then get on with it again

Radiantsoul

cepheus wrote: »

It seems strange seeing the stock-market posting new highs whilst the UK recovery is still fragile.....
Is this an equity bubble caused by quantitative easing, low interest rates and subsequent poor returns on bonds, or a genuine prediction of a recovery? What happens if this QE fuel stops?

I think the stock market is a leading indicator. So it ought to improve before the wider economy does.

Presumably higher interest rates would cause the discount rate on future income to decline and so lower share prices.

The P/E ratios of FTSE250 do seem quite high http://www.moneyweek.com/news-and-charts/uk-share-performance-table?index=FTSE250. Some potential bargains too though.