How do I know if the stock market is in a bubble?
When Mom starts giving me stock tips.
And she hasn’t, not once in this five-year bull run we’re in. Compare that with the late ’90s, when it seemed like she was calling every week to drop a get-rich-quick tip that would make me want to ditch my day job for day trading.
When you start looking at the numbers, it’s actually quite extraordinary to see how far the stock market has roared back — and how we have mostly chosen to ignore it.
Five years ago this week, the Dow Jones industrial average skidded to the 6,500-point level as the world churned through a financial crisis and the Fed desperately pumped money into a lifeless economy.
At Tuesday’s close, the Dow was just shy of 16,400, following a year in which it grew by nearly 30 percent. That means you didn’t have to be legendary investor Peter Lynch to figure how to make money in the market.
Put it another way, if you kept investing in the biggest US stocks near the October 2007 market peak through the end of February, $10,000 would have swelled to over $13,800, including dividends, according to a Morningstar analysis of the S&P 500. If you pulled out near the bottom, you would have lost close to $5,000.
Despite eye-popping returns, a lot of cash is still sitting on the sidelines in safe CDs, money markets, and probably under a lot of mattresses. The memories of two big crashes less 10 years apart are seared into our 401(k) portfolios.
That’s one of the reasons some Wall Street gurus don’t think we’re heading into a bubble — the point at which good times suddenly implode. Sure, corporate profits are expected to rise, interest rates remain low, and the nation’s economy is growing, but droves of mom and pop investors have yet to jump into stocks, prompting a new round of buying that would push healthy stock prices even higher.
“Because it is such an unloved bull market,” said Sam Stovall, chief equity strategist at S&P Capital IQ, “the market still has room to move.”
In this town, John Spooner should be feeling the love. But over dinners and cocktails last year, the charming Boston money manager — who is a also best-selling author on investing — might as well have been a social pariah.
“Not one person brought up the subject of the stock market, which was amazing to me,” said Spooner. “There is almost a generation of Americans who don’t think anything will be good again.”
During the late ’90s dot-com era, Spooner’s phone rang off the hook with calls from clients stressed over whether they might be missing out on the next big thing.
“It was rampant greed,” he said. “My neighbor is getting rich.”
‘There is almost a generation of Americans who don’t think anything will be good again.’
John Hailer, who oversees the mutual fund firm Natixis’s investments in the Americas and Asia, said today’s investors are more sophisticated. They’re asking about unemployment numbers, the retail sector, the Chinese economy. And if anyone is worried about a bubble, he’ll tell them it doesn’t matter.
“I don’t really care if we are at the top. I don’t care if we are at the bottom,” he said. “Without risk, you don’t get a return.”
Our new sober attitude — however sobering — is actually healthy. We’re thinking about how to invest for the long term — buying and holding. We’re not glued to CNBC, chasing paper riches and trolling for stock tips from cabbies, bartenders, or hairdressers.
Joseph Kennedy Sr., who was a savvy investor, liked to joke about how he survived the 1929 crash that ushered in the Great Depression.
The summer before, he started to get unsolicited stock advice from people like the shoeshine boy and the newsstand dealer. That’s when he knew it was time to get out, finding no wisdom in crowds.
Today, even Eddie McGuire, the longtime bartender at the Langham Hotel in the heart of the Financial District, has stopped passing along tips. It’s just as well, because the traders and brokers who stream in after the 4 p.m. Wall Street close aren’t saying much about what they’re into.
Instead, over Bud Lights, they’re complaining about how commissions used to be better. Back in the ’90s, it was martinis all around.
“It’s not really as fun as it used to be,” said McGuire.
What we’ve learned, in all of this, is that maybe Mom doesn’t know best. Buying is easy, selling is hard — and best left up to the professionals.Shirley Leung can be reached at firstname.lastname@example.org. Follow her on Twitter @leung.