Is a Market Bubble Coming? Yes and No.

Is a Market Bubble Coming? Yes and No.

Reasonable arguments can be made that stocks are overvalued and that a correction or even a bear market is imminent. Reasonable arguments can also be made that stock prices are going to continue to rise, at least for the foreseeable future.

The Dow Jones Industrial Average continues to break records.


Arguing for a continuing rise in stock prices, Donald Luskin, chief investment officer at Trend Macrolytics LLC, wrote in The Wall Street Journal that, “Tax Reform Has Released the Bulls.”

Less than a week later, Martin Feldstein, chairman of the Council of Economic Advisors under President Reagan, wrote in The Journal that, “Stocks Are Headed for a Fall.”

We’ve written in the past that stocks are overvalued, noting that, using Shiller’s cyclically adjusted price/earnings ratio (CAPE), prices as a ratio to earnings were in the 95thpercentile. We’ve also suggested, though, that tax reform and deregulation will continue to boost stock prices higher.

We believe the market will continue its upward trend perhaps through 2018, but recognize that a bull market cannot continue forever. As we wrote recently, “We’re in the second longest bull market ever. … Stocks are currently very overvalued, but we expect the bull to continue charging through most if not all of 2018, with a few setbacks along the way.”

Of course, no one knows for certain what will happen, but the arguments of Luskin and Feldstein are worth considering. We will share them with you in our next two posts.

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