Many investors are anxious about a possible bubble in stock markets, but those fears seem overblown to us. The greater near-term danger may be a more aggressive Federal Reserve.
With the Nasdaq crossing the 5,000 threshold for the first time since the dot-com boom and the broader equity bull market entering its seventh year, many investors are once again anxious that stocks are in a bubble. Is it time to get out of stocks? For long-term investors, we think they should consider staying invested. As I write in my weekly commentary, the greater near-term danger may be somewhat more prosaic: a more aggressive Federal Reserve (the Fed).
Market Realist – US equities are beginning to look expensive
The tech bubble burst back in 2000 changed some investors’ perceptions about stocks. Talking about it still brings up the stress levels of certain investors. Stock participation in the United States has dipped since 2000. However, if you follow certain rules of investing, including a long-term view on US equities, you should benefit from investing.
Since the bull market began in 2009, tech stocks (XLK) have performed very well, backed by very strong earnings. The above graph shows price returns on the Nasdaq Composite Index (QQQ). In the last six years, the index has given returns of 293.5%, which means the index has grown by almost four times.
This is a sensational CAGR (compounded average growth rate) of 25.6% in the last six years. Within tech stocks, Apple (AAPL) has given a CAGR of 48.7%. Google (GOOG) and Microsoft (MSFT) have given returns of 25.8% and 19.0%, respectively, in the same period.
Remember, technology stocks make up 43% of Nasdaq. The S&P 500 (SPY), which is less tech-heavy, has given a CAGR of 20.7%, which is less than the Nasdaq.
Over the last six years, earnings have run up tremendously, but so have valuations. This is due to the premium commanded by the tech stocks because of their strong balance sheets. Investors are now wary of the valuations.