Bubble, Bubble, Toil, and …

Is the stock market becoming bubble-icious?

The S&P 500 is up 50% since the middle of 2012. The price-earnings ratio has risen from 14 to 17 times trailing 12-month earnings, according to Bloomberg. And speculative IPOs for companies like Twitter and Candy Crush seem to be multiplying. Are we headed back to the giddy heights of the 2000 tech-bubble?

Consider some facts: in the first quarter of 2000 there were 123 IPOs. Their average first-day returns were an eye-popping 96 percent. In the first quarter of 2014, there were only 58 offerings, and their first-day returns were only 22 percent. 2000’s IPO lineup included Va Linux, Globe.com, Foundry Networks and Webmethods all returning over 500% on their first day—all of which are now defunct, by the way. The first quarter of 2014 had such pedestrian offerings as Zoes Kitchen, Akebia, Rubicon, and GrubHub offering 30% returns. And all in different sectors, by the way.

The fear of overpaying should dampen speculative spirits for a while. We’ve been through two 50% declines in the past 15 years—something that hadn’t happened since the Great Depression. It’s unlikely investors will forget those lessons anytime soon. But fears of excessive animal spirits will keep popping up. A new story in the Wall Street Journal notes the return of the miniskirt for this spring’s fashion lineup. The “hemline indicator” has been with us since the ‘20s. Well, it must be the silly season. Skirt-length doesn’t predict financial performance.

The more people worry about a bubble, the less we have to worry about a bubble. The only thing the market has to fear is the lack of fear itself.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2014-04-17T10:15:41+00:00 April 17th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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