12 Reasons Not to Fear a Market Bubble


The idea that financial markets will go into another freefall like the one that hit in 2008 has never been entirely left behind by many investors. It's one of the reasons a lot of them missed the current stock rally and stuck with bonds.

Now bonds, too, are being talked about as a risky bubble that will pop as soon as the Federal Reserve hikes interest rates. Meanwhile, in 2013, stocks are seeing the biggest gains in years. What's an investor supposed to do? It's not exactly "Don't Worry, Be Happy" time. But too much fear can be counterproductive.

Investors should start by reviewing all of those dire warnings. They can't all be true. It's never foolish to keep a dose of healthy skepticism. But it's hard to support the view that financial assets are totally unhinged from the "real" economy. Here are a dozen reasons why stocks and bonds are not bubbles waiting to burst (along with some reasons analysts and fund managers say there could still be trouble, even if there is no bubble).

1. Crashes don't come when people expect them. Back in August 2008, there was not much talk of stocks being vulnerable. Google Trends shows that the search terms "stock bubble" and "stock crash" fell to the lowest level in the nearly five years the month before the crash. They've risen steadily this year. But search traffic is one thing. Valuations are another. And those could be high. Bond yields are near all-time lows, not even covering the cost of inflation. Stocks are close to their average based on underlying earnings. "The case for a bubble in the bond market is a strong one. The case for a bubble in the stock market is not a strong one," says Hugh Johnson of Hugh Johnson Advisors. "The real question: Can the Fed let the air out of the bond market in a way that bond-market trading remains orderly?"

Read the entire article on US News and World Report.