Believe It or Not... the Market Should be in a Bubble.
Here are some reasons:
- Interest rates have been at or near generational lows for almost a decade.
- The housing market is somewhat overheated.
- Households have some of the most robust balance sheets ever coming out of a recession.
- The market has been up 11 out of the past 12 years.
- The biggest down year was 4%, and 9 of those 12 years saw double-digit gains.
Therefore, if history has any validity, the market should be in a bubble. And yet, this doesn’t feel like a bubble or detached reality.
The market makes sense.
There are two types of bubbles: rational and irrational. Irrational bubbles are created from excessive, ungodly multiples of intrinsic value coming down to actual value. An irrational bubble is built around some false misconception or some false prediction of what everyone predicts for a new world. These predictions are usually not accurate and are based on unproven facts. A recent example is that we are all going to work from home for the rest of our careers.
My observations are that we are in a rational bubble. The economy is growing at a faster rate than we ever expected after the pandemic. High levels of government spending, the current status of interest rates, the current state of the economy, and the Fed's current stance support the high market.
In the next blog post, I’ll be discussing a true rational bubble.