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Are we in a Stock Market Bubble?

The potential for the stock market to collapse seems to be on everyone’s lips these days. Not a day goes by that I don’t see an article on a major financial news site about the impending stock market collapse. Some even ask are we in a “Stock Market Bubble?”

Age of the Bull and a Stock Market Bubble

Much talk of the current state of the market starts with how long the market has been raising. Articles like this is the 9th straight year of market increases, and the longest increase since (name that crash). So, the first thing we can get out of the way is, there is no age limit on market moves. Whether the current market movement is up, down, left, right, or horizontal, the fact that it’s been 9 years since the last recession has no bearing on what the market will do next. Even if it did, the argument misses that while year on year growth has continued over the 9-year period, several shorter corrections have occurred during this period. How long should the correction be to reset the imaginary clock on a bull lasting too long? Does it need to be a full-scale recession or is 3 months enough? So, let us dismiss the aged bull argument out of hand and ask the more important questions.
The two most compelling arguments I’ve heard that a stock market bubble is currently in effect are that investors are way too positive on the market and that valuations are too high for earnings. We can examine these one at a time.

Investor Sentiment and a Stock Market Bubble

The first is whether investors are way too positive on the market. On the one hand, I agree in some respects. Look purely at how many people are now touting being 100% stocks. The number is at quite a high. Another indicator might be the number of personal finance bloggers appearing on the scene, especially those specializing in early retirement. A common refrain about past stock market bubbles has been that when even the paper boy is giving you opinions on stocks it’s time to get out of the market. We may be approaching that point.

However, there is a contrarian point as well. How many articles like this one are simply questions of if there is a bubble or is a crash coming? Admittedly most of them have much less substance.  Still the media itself is not currently unabashedly positive on the market, and yet their voiced concerns about the market have not led to a crash. I.E. maybe investor sentiment is not as positive as what would appear from ancillary evidence. Now I would be remiss from mentioning that per Robert Shiller in “Irrational Exuberance 3rd edition” the media often precipitates the moves of the market, but reaction lags news by some time period. As such it is possible the crash is coming and the media’s concerns have kicked off a cascade of a crash we will see in a few weeks or months now that people are paying attention.

So, what about valuation?

Company earnings are growing again after a period of stagnation in 2016. The problem is the price of the market is growing faster than earnings. The S&P500 has gained over 20% in the last year. That is way more than earnings increases, and more this year to date than most forecasters predicted for the entire year!

Not only is the growth of price outstripping earnings, but existing valuations are already high. Shiller’s own CAPE Ratio, which measures the price per equity (P/E) over the last 10 years, is currently at 27 compared to a normal 16. Even normal P/E is 25 compared to a historical average of somewhere between 15-16 depending on your starting point. Even if you consider only the last 25 years, assuming they are somehow unique due to the internet the average is only 19. So, by any measure the market is overvalued and prices are rising faster than earnings.

Does this Mean the Market Will Crash?

Most certainly the market will crash….. but when is a major question. The current market position is both overvalued and has an abundance of bullish behavior. But it is by no means the highest it has ever been for an up market. Pre-price bubble pop in 1999 the P/E ratio was over 30. CAPE P/E in 1999 was 44. Obviously, this is significantly higher than a CAPE P/E of 27 and a P/E of 25. Furthermore, if we go back to the Stock Market Bubble of the dot com era we see irrationally bullish movement for years before the collapse. Allen Greenspan gave his famous “Irrational Exuberance” speech in 1996. The CAPE P/E at that time was at 25. It took another 3 years for the market to fall. That’s three years of dividends and increasing stock market returns. So needless to say, the fact that the market is overvalued does not mean a crash is coming any time soon.

So why did I say “Most certainly the market will crash”? Simply put, crashes happen. The market itself is defined by a tendency to go up in the long run with periods of significant downward medium term movement. High P/E or low, a crash will occur at some point in the future, it is an inevitability. However, since we can’t show when that crash is going to occur we must instead stay the course lest we miss out on the interim gains. The best course of action is to ignore market news and just continue to stick to our plans.
Do you believe a crash is coming? When? Why?

This post has an Affiliate Link to Shiller’s book. Should you choose to purchase through this link I will receive some renumeration through no cost to you. I enjoyed this book.


  1. I don’t know. Personally, I want to wait to see what kind of policy changes come out of the White House. If we are going to spend a lot of money on infrastructure, inflation will come on, interest rates will rise, and there could be chances for a correction in the real estate and equity markets.

    About a month ago, I would have said a correction would be coming 12-18 months. I have no idea though, I think there’s been a lot of “bubble” talk for the last 3 years… history repeats itself but in unpredictable ways!

    • March 1, 2017

      It’s hard to tell what the White House will do and laws can definitely have a profound impact on the economy. Only time will reveal all.

  2. Mrs. BITA
    Mrs. BITA March 1, 2017

    A crash is coming. With the stock market a crash is always coming. That is the nature of the beast. The question is: am I doing anything different? The answer is: since my crystal ball is about as useless today as it was yesterday, no, no I am not.

    • March 1, 2017

      Life would be a whole lot easier if that crystal ball would just tell us what the market would be like a year from now…

  3. Go Finance Yourself!
    Go Finance Yourself! March 1, 2017

    Agree completely. It’s like people trying to guess the next spin on the roulette wheel based on the previous 10. It doesn’t matter. Also agree with investor sentiment on the current market. Past bubbles have been marked by people diving in with no thought of what they were doing. In 2000, many thought we had fixed the market and we could never have another crash. The market would just keep going up. Nobody outside of a handful of really smart people saw the financial crisis of 2008 coming. This doesn’t feel like that at all. The bull run continues, but I think people are still very cautious about it.

    The next market downturn is inevitable. That’s just what the market does. It goes up and down and sometimes those spikes can be severe. When the next severe downwards spike is anyone’s guess. While experts like to think they know, in reality no one does. People have been calling for a correction since 2011. Six years later it still hasn’t happened. So I’ll continue to invest while the market is up and will continue doing so when the market goes down. Because as we all know, the market goes up over the long term.

    • March 1, 2017

      Great points GOFY! Imagine how bad you’d kick yourself had you pulled out in 2011.

  4. FinancePatriot
    FinancePatriot March 1, 2017

    I don’t know that we are in a bubble yet. The bubble of 2000-2002 was preceded by historically unusual and high gains. The past few years have been good, but not bubble level yet.

    I think a nice 10% correction, though, would help things out until earnings catch up to valuations.

    • March 1, 2017

      I wouldn’t mind a ten percent correction to help with the psychological aspect of feeling like I’ve won by buying on the dip. You never know.

  5. Max Your Freedom
    Max Your Freedom March 1, 2017

    I agree it’s impossible to tell these days. I thought we were in a bubble back in 2013 when we broke back through old highs, and the economy itself appeared in shambles still. I don’t believe the economy is that strong, but the fed injections have kept the party rolling. I’ll admit I’m very skeptical of the market, and my actions back that up. My positions are very highly skewed to cash at present. I recognize this may not be very wise, but the value investor side of me won’t allow me to buy. What can I say, I just like buying during fire sales!

    • March 1, 2017

      Interestingly enough, while you found the high in 2013 may have been top, GOFY remembered the calls in 2011 that we had hit top. It just goes to show you that prognosticating is a losing battle. I too am skeptical of the market given how much propping up the fed has done. That being said I’m fighting the urge to follow that emotion as I know just because it has been propped up does not mean the market will collapse when the support is removed. More likely the support will never really be removed, just changed. Are you parking funds in cash, or cash like equivalents? Is it fundamentally changing your asset allocation? I’m staying the course.

  6. Leo T. Ly @
    Leo T. Ly @ March 1, 2017

    I think that it’s a waste of time to try to guess when the market will crash. I prefer to continue to invest and build flexibility into my own finance to create opportunities for myself if the market do crash. I will buy more if the market crashes. If it doesn’t, I am not loosing out as I am fully invested.

    • March 1, 2017

      Great attitude. The younger you are the less a crash will matter to you specifically.

  7. Mustard Seed Money
    Mustard Seed Money March 1, 2017

    I feel like this is the most depressing bull market ever. I feel like with most bull markets and bubbles that people are enjoying themselves and not even worried about when the market will pop the bubble. But this market it seems like everybody is trying to pop the bubble before it’s time and they keep missing. I have a friend that has been trying to time the market since 2011 when he thought it was overvalued. Goes to show you that timing the market can be a fools game.

    • March 2, 2017

      It does seem like at every turn someone is calling for a top. A bit of a contrarian indicator for an irrational bubble by itself.

  8. Gary @ Super Saving Tips
    Gary @ Super Saving Tips March 2, 2017

    I do believe a crash is coming, because a crash is always coming sometime in the future. As for when, I have no idea and that’s why I don’t try to time the market. I completely agree that “the best course of action is to ignore market news and just continue to stick to our plans.”

  9. SMM
    SMM March 2, 2017

    I’m only continuing to invest in my 401k via dollar cost averaging – don’t wanna stop doing that no matter what (of course that cost is high right now). But I feel like it’s better to hoard cash because yes I too believe companies are overvalued (just look at how high some of the P/E ratios out there are). Just gonna be like Warren Buffett and buy low when it looks right.

    • March 2, 2017

      Is the hoarding appreciably changing your asset allocation or is it small amounts?

  10. Liz@ChiefMomOfficer
    Liz@ChiefMomOfficer March 3, 2017

    I’ve found a good measure of bubbles is when people who don’t know anything about the subject start discussing it. I remember reading once something like when your hairdresser starts talking about real estate with you, you know there’s a real estate bubble. We were due for some good markets after the “lost decade” of the 2000’s. If my hairdresser starts giving me stock tips, I’ll know it’s time to look closer at a bubble. Overall though, I’ll just stay the course as I was in 2007, 2008, 2009, and beyond.

    • March 3, 2017

      The question is, does your hairdresser give good stock tips?

  11. Rich @
    Rich @ March 4, 2017

    The problem with bubbles is that they are obvious to everyone after the fact, but only to a few while in process. It’s now OBVIOUS that tech stocks were in a bubble in 1999. Houses were overvalued in 2006. In a few years, we’ll be examining how low interest rates + QE fueled the current rally.

    You’re right that the big question for most people is what to do with their own savings. I would not tell anyone to dump their strategy, but I would just say that we should be aware of assumptions. To be 100% invested in stocks (with no other asset classes) and disregard valuations because “stocks always bounce back” is to maintain a big assumption. Stocks in the US have bounced back from previous bubbles, but that’s a small snippet of history. The Nikkei in Japan is much lower than it was in 1989. Stocks don’t need to do anything based on history, whether in the US or anywhere else.

    I know this is contrarian to conventional wisdom, but I always consider price and valuation when buying anything, and I don’t see why stocks should be any different. I’m not going to bet my nest egg on an asset (in this case the general market) that by most measures is overpriced, possibly very overpriced. There are other assets to buy (real estate, small businesses, etc, etc). We’re only limited by our time and imagination. Just my opinion!

    • March 4, 2017

      Regardless of my opinion on markets I feel a good asset allocation is important. I agree 100% invested in stocks is a bad way to go.

  12. DivHut
    DivHut March 5, 2017

    Bubble or not, as you stated, a crash will occur. The key thing to remember is that timing the market is impossible so in the meantime just stay invested, keep buying where you find good relative value and yield and ride out any future storms and don’t panic sell.

  13. Mrs. Need2save
    Mrs. Need2save March 5, 2017

    It is hard to believe that recent increases can be sustained for long. We will probably do exactly what we did in 2008 and that was pretty much nothing. In fact we were so confident the market would recover then that we took on a bigger mortgage and house. No plans to upsize this time but we will ride out the dips with just as much confidence. Stay the course and rebalance a little if needed.

    • March 5, 2017

      Gutsy move on the mortgage. In our case we made some adjustments to our savings rate by delaying some purchases after the crash to get more into the market, not less. It paid off very well.

  14. Jim @ Route To Retire
    Jim @ Route To Retire March 16, 2017

    Very nice analysis! I made the mistake of sitting on some extra money and was waiting for a dip before buying some more index funds. Unfortunately, I’ve been waiting for a couple months now with no good dip in sight! 🙂

    Somehow I’m sitting here doing the exact opposite of what I preach. The good news is that it’s only a few thousand dollars and has nothing to do with my regular contributions to other vehicles like my 401(k) and Roth.

    — Jim

    • March 16, 2017

      I actually had a few weeks in January where I was doing the same thing with a small amount of cash. Ultimately, after about 3 weeks of missing the boat I decided to put the cash into a REIT index fund since I have been considering creating some real estate space in my asset allocation. It didn’t hurt that REITS are a bit depressed compared to the overall market.

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