Blog : Market Bubble? Not Just Yet

by Ed Zwirn on November 23rd, 2013

Investor sentiment is said to be one of the most reliable bubble indicators. Investors with unreasonable expectations of painless profit in the stock market may pump up stock prices and volumes, but the herd mentality can be irrational and herds can quickly stampede in reverse.

But are investor expectations unreasonable? Maybe not as much as you would think at first glance.

I'm led to this conculsion in part by a poll I saw on a financial website. According to the results of this thoroughly unscientific survey, nearly half (43.5%) of respondents believed that the NASDAQ Composite would hit 5,000 within two years. A subset of these (17.75%) thought this benchmark would be reached within a year.

But how bullish is this sentiment?

The NASDAQ would have to rise 25.3% to reach 5K from its present 3,991.65. A two-year timeframe would put the annual gain at about 12.5%.

This prediction pales in comparison to the actual performance of the index when you look backward. The NASDAQ has gained 35.9% over the past year alone. Stretch that timeframe out to two years and the number becomes 62.3%.

Looking at the same poll, there were also a fair number of naysayers, with 19.8% predicting NASDAQ 5K would take up to five years to become reality and nearly 21% thinking that that day would never come.

For what it's worth, then, the indication here is that investors are about evenly split between the moderately bullish outlook that the broad market will see steady (while decelerating) gains over the next two years and the bearish take on things: That it is time to go chill in a cave (at least until spring, when you can score picnic baskets on the cheap).

For now, I'm throwing my lot in with the moderate bulls. Things appear to be lining up for at least several more months of full-steam market impetus on the part of the U.S. Federal Reserve Bank, with the requisite government crisis not expected until February's debt ceiling posturing.

But, unless our politicians prove to be more irresponsible than even I can imagine, the February "crisis" will prove to be another blip on the screen. Beyond that, look for more money to continue to pour into the stock market and, at the same time, more talk that we are in the midst of a bubble about to burst. A correction is of course inevitable at some point, but for now the sentiment out there is hardly indicative of "irrational exuberance."