NASDAQ 5,000: Are We In Another Bubble?

The NASDAQ 5000 has increased exponentially since the trough of the Great Recession despite low economic growth, leading to the consensus that Fed policy has created another asset bubble.
The NASDAQ Composite has increased exponentially since the trough of the Great Recession despite low economic growth, leading to the consensus that Fed policy has created another asset bubble. Many bull market economists dispute this view, mirroring thoughts during the height of the dot-com bubble.

Given the poor economic performance of the United States in recent years, it surprises many that the NASDAQ Composite has nearly returned to its highs during the dot-com era, which was the longest economic expansion in US history. This regained milestone also poses another question: is the US economy currently experiencing a market bubble?

The March 1991 to March 2001 economic expansion was the longest and largest of any in United States history. US GDP grew at above 4% annually in 1997 (4.5%), 1998 (4.5%), 1999 (4.8%), and 2000 (4.1%). The NASDAQ Composite reached an intraday high of 5132.52 on 10 March 2000, before diving to 1108.49 on 18 October 2002. The combination of the failure of FCC-mandated CLECs, burst of the dot-com bubble, and a flurry of accounting scandals (Tyco, WorldCom, Enron) weighed heavily on the technology-dominated index.

It should not shock many that the US’s economic performance is more dismal than during the dot-com boom. GDP growth was 2.4% in 2014, and has never reached above 3% since the Great Recession. Despite this, the massive accumulation of corporate debt in recent years (especially in the technology sector) mirrors the same trend during the financial crisis. Overvaluations and high price-to-earnings ratios concern many economists.

Peter Schiff, CEO of Euro Pacific Capital, voiced that Uber’s latest $41 billion “valuation is absurd. And there’s a lot of companies like Uber that are sporting these billion-dollar market caps.”  Wild overvaluations are not the only symptom of the current bubble. There’s been a major move to more speculative investments due to low interest rates. This is evidenced by the recent rise in stock buybacks that public companies have facilitated. After accounting for inflation, many savings accounts, certificates of deposit, and Treasury securities generate negative real returns. This will later end in financial capitulation, or flight to quality, as traders will be forced to expunge riskier assets from their portfolio after the bubble bursts.

The Federal Reserve’s $3.7 trillion quantitate easing program was aimed to stimulate investment after the Great Recession by purchasing bank debt, mortgage-backed securities, and Treasury notes. QE has clearly pushed up asset prices above equilibrium levels, causing massive amounts of malinvestment in the economy. The Fed’s only option is to facilitate a discount rate increase within the next year, thus bursting the current bubble.

Economic conditions revolve less around timing of interest rate increases than Fed response to the ensuing financial crisis due to cash flow management difficulties that arise from an increase in debt service costs, among other results aforementioned. My worry is that the FOMC will use the downturn to begin QE4, creating another asset bubble. Poor policy by the Fed in recent years has made many reconsider the central bank’s role in the economy, for better or worse. Perhaps optimal monetary policy will one day set the stage for solid, real economic growth.


24 thoughts on “NASDAQ 5,000: Are We In Another Bubble?

  1. George Rallins March 3, 2015 / 1:19 pm

    Of course Vega is right…compared to 2% on a ten year people are being forced into stocks+all the countries around the world buying equities at the slightest dip via QE.Japan, Europe, China central banks all buy stocks and probably we do to.I remember when central banks were never heard from except when the currencies got overdone to either the up or downside…then they d step in with an “intervention”.Now they re involved in every facet of the markets.When does it backfire or become unsuccessful? It can t go on like this forever can it? Looks like they re going to attempt to keep it going for at least 2 more years….then what, a crash?

  2. stefanb March 3, 2015 / 2:06 pm

    Just remember this with the liberal media. Nasdaq 5000 under a Republican President equals a crash afterwards. A Nasdaq 5000 under a Democrat President equals a prosperous future.

    • Blarg March 3, 2015 / 4:02 pm

      Just remember this. If you’re stupid enough to believe this nonsense you’re probably a compete failure and living off my tax dollars regardless of who POTUS is.

      • StefanB March 3, 2015 / 7:01 pm

        That’s what I’m saying. Many suckers will vote Democrat and destroy the economy.

  3. Carl Newport March 3, 2015 / 4:07 pm

    I think that Zach’s right with the bubble. It’s going to be an unholy burst.

  4. The Bouncer March 3, 2015 / 4:48 pm

    Think about the inflation that has occurred in the last 15 years. It’s not really a “record high” until you adjust the number for inflation.

    Also think about the amount of money that has been printed as part of “quantitative easing”. Much of this money has ended up in the stock market.

    • James_R March 3, 2015 / 6:49 pm

      Zach kinda said that QE was causing this in the article.

      • The Bouncer March 3, 2015 / 6:51 pm

        Yeah, Zach’s got it right, but many don’t realize that’s the main driver.

  5. Jellin’ with Yellen March 3, 2015 / 5:12 pm

    The fact that few startups can even get to the Dow Jones shows the joke in premises

  6. Mike Masterson March 3, 2015 / 6:55 pm

    The economists Kenneth Rogoff and Carmen Reinhart came to that general conclusion for a 2009 book after studying eight centuries of booms and busts. Their title quoted the claim one always hears about market frenzies, often just before the crash. They called it: “This Time is Different.”

  7. New Strides March 3, 2015 / 6:59 pm

    This is the situation coming on the heals of the QE strategy, i.e. another bubble. Watch your investments closely! The Obama-Yellen Cartel needs to stop NOW!

  8. Rocket Charts March 3, 2015 / 7:25 pm

    We are finally where we were 15 years ago. Back then, it was a bubble. Now, it is just where we should be. Learn to manage your own money, so you can be out at the click of a button, and don’t worry about the level of the indices.

  9. RolePrice March 3, 2015 / 7:40 pm

    BUY ..BUY ..BUY ..Like there is no tomorrow. But don’t commit suicide when it crashes.

  10. duke March 3, 2015 / 7:57 pm

    Time to worry when you have FB and TWTR are 78 and 48. The whole system is rig by the Federal Reserve. I have all my money in hard assets gold and real estate.

  11. YooHoo18 March 3, 2015 / 10:18 pm

    Massive amount of money has been created. Companies have been using low rates to buy their stock back. More and more dollars chasing less available stock. With that math the market can only go up – slow growth ? Recession ? Dodgy earnings ? Grexit ? they don’t matter

  12. BBweeks March 4, 2015 / 2:37 am

    Last year, according to Doug Elmendorf, (in a recent letter), government spent $600 billion off budget. It ran up debt of $1.1 trillion, with a $485 billion deficit in FY 2014.

    Does the debt matter? Paying it off is a moot point. Servicing it is not. We paid $430 billion in interest in FY2014 with tbill rates near zero. Huge debt will matter when 1. Treasury begins having difficulty rolling it in a climate of negative interest rates, or 2. Interest obligations crowd out other important fiscal needs due to higher rates.

    Neither one of those conditions matter now. The $23.5 trillion in consumer debt is obviously taking its toll on spending, if this mornings figures can be believed, where wages increased by .3%, and consumer spending dropped by .2%. Either debt retirement or savings is occurring.

  13. Bleach March 4, 2015 / 4:31 am

    The splash screen for this story asks us if, with the NASDAQ at 5,000 for the first time in 15 years, it is “time to worry?”

    It’s always time to worry. If there was known way to always gain and never lose with equities, more than a few people would be doing it (from time to time). Then again, some folks will come home wealthy tomorrow morning on the red-eye from Las Vegas.

  14. M29 March 4, 2015 / 4:56 am

    Starting to move closer from expensive market into bubble market even when taking into account 0% rate policy , if there was no 0% policy then these current market levels were already big bubble.

    the gap between markets and real economies gone wild , the gap is fueled by central banks, when they move out or when markets will see that the policy has failed then the gap will move down quickly imo.

  15. Yroeu March 4, 2015 / 5:17 am

    Bubble, bubble, toil and trouble…….
    Why blame the whole market – NASDAQ?
    If certain company stocks are overvalued, then the trading computers need to dump them. If a company stock is fairly priced, what’s the problem?
    The name of the game is profitability.

    • You've Been Grubered March 4, 2015 / 5:46 am

      The name of the Fed’s game is if the S-P as a whole is in a bubble, when it collapses it will take down all companies, regardless of how fairly priced their stock is.

      • Yroeu March 4, 2015 / 5:48 am

        When price to earning ratios are fair, I think conditions do not support the bubble theory. I have a tendency to see the world in a positive light, not in one of doom & gloom.
        Will there be another war someplace? Yup. But, I don’t focus on the negative side of life.

        • Zach Vega March 4, 2015 / 6:52 am

          Here’s a list of the highest Shiller price-to-earnings and the corrections that followed them:

          1999: 44.19 (-49%)
          1929: 32.54 (-89%)
          2015: 27.79 (-??%)
          2007: 27.54 (-57%)
          1901: 25.18 (-37%)
          1966: 24.06 (-22%)
          1968: 22.28 (-36%)
          1937: 22.23 (-48%)
          1961: 22.04 (-26%)
          1956: 19.37 (-21%)

          I don’t think that you can call current P/E ratios anything closely resembling “fair”.

  16. Ken2283 March 4, 2015 / 7:17 am

    Celebrations like this end badly…..we’re patting ourselves on the shoulder as we hit a number based on Massive money printing, 0% interests rates, and accounting gimmicks and stock buybacks. Everyone knows this growth is not ‘organic’, but continues to pretend all is great. Another Bernie Madoff moment……

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