Why The Australian Stock Market Isn’t In A Bubble

Investing legend Jeremy Grantham says stocks are heading towards a bubble.

He’s talking about US stocks.

He says they’ll reach the bubble stage when they’ve gained another 14%.

We have to say that doesn’t seem like a bubble to us.

Even if you look at where the US stock market has come from. Sure, it has come a long way. But a bubble?

No.

Not yet…

We like to call it ‘bubblemania’.

Just like any other mania, those caught up in bubblemania become obsessed by it.

It’s a craze…an obsession…it’s, well, a mania. They refuse to accept that anything could happen that would cause them to be wrong. They insist the stock market is in a bubble and that it must crash — sooner rather than later.

In our view, the bubble maniacs are just as deluded as the poor souls who think house prices and stock prices can only ever go up.

But if we had to pick sides at the moment…if we had to bet whether the stock maniacs or the bubble maniacs will win the argument over the next five years, we’ll put our money on the stock maniacs any day.

Three things to know about stocks today

One of the arguments the bubble maniacs like to use is that the US stock market has taken off since 2009.

They say that the triple-digit percentage gain since the March 2009 low is proof that stocks are too expensive.

We can’t argue with the big gain. The US S&P 500 index is up 189% since March 2009. That’s an average annual gain of 35%. That’s a big return.

But is it in the land of the bubble gains? Not in our view.

But is the US market due for a correction, and could stock prices fall? We’ve no doubt that’s possible.

Remember three things.

First, remember that US interest rates are a key factor in stock prices. Whatever the talk about interest rates going up, know for a fact that interest rates aren’t going anywhere…except perhaps even lower.

Second, as we’ve noted for some time, this is exactly the kind of market action the US Federal Reserve wants. It likes the fact that stocks are going sideways for a few weeks…perhaps even a few months.

This is all part of the plan for the Fed to engineer a gradually rising stock market over the next 10 years, while it maintains record low interest rates.

Third, yes US stocks have done well since March 2009. But it’s important that Aussie investors don’t mistake the great US stock market performance for the below par Australian stock market performance.

Because since March 2009 the S&P/ASX 200 index has gained a measly 49.3%. That’s an average annual return of just 9.2%.

We don’t care what anyone says. No way is that a stock bubble.

However, it also doesn’t mean that some Australian stocks haven’t put in some good returns, because they have. In fact, because the Aussie market has been so bad, our bet is there are plenty more gains to come as investors see value, especially in Aussie growth stocks.

Life-changing gains

The broad defining feature of a stock bubble is that stocks go up for no apparent reason.

Or that they go up for a reason, but the reason for the rise is down to nothing more than hope, dreams, and some far-fetched vision of the future.

You can also say that a bubble is a result ofeuphoria and exuberance. Perhaps even a little hubris and cockiness. But we’ll challenge anyone to show us where that shows up anywhere in the Aussie market.

As far as we’re concerned, it’s easy to justify the stock gains that we’ve seen close up. That even goes for the niche natural gas stock that we tipped in Australian Small-Cap Investigator in 2012, which is now up 551%.

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