After two bubbles in the past 10 years — tech stocks and real estate — investors are suspicious of consistent gains that seem too good to be true. Some worry that the Fed's dramatic measures to pump up the economy mean the market's gains are an illusion. But a range of measurements suggest the market isn't in the midst of a bubble now. Instead, the stock market may simply be back to normal.
One sign of a bubble would be if stocks rose far beyond what's normal by historical standards, says Bill Stone, chief investment strategist at PNC Asset Management Group. By that measure, it's not happening yet. According to Stone's research, since 1928, the average bull market runs almost five years and gains 164 percent. By comparison, this bull market has barely hit middle age.
The Standard & Poor's 500-stock index is in its fastest climb since 1955, doubling since the market bottomed on March 9, 2009. In January and February alone, it's up 5.5 percent.
Judged by other measures of value, the companies that make up the S&P 500 look rich. Investors are paying 24 times inflation-adjusted earnings over the last decade. The historical average is 16. That ratio could climb if people push stock prices higher because they expect earnings to catch up. But Arnott believes people are already underestimating larger problems ahead. The U.S. government's $14 trillion in debt and a greater share of the work force hitting retirement are both bound to drag down economic growth. "That's quite a hurricane," he says.
...investor Jeremy Grantham, chief investment strategist of GMO... [states] If the S&P 500, at 1,321 on Friday, climbs to 1,500 by October, then watch out. At that point, he says, "it will be a market looking for an excuse to go. On the first piece of really bad news, it will make a determined effort to tank."
Several recent studies suggest that the new jobs pay less and offer fewer work hours than the ones they have replaced...
• Lower-wage industries -- things like retail and food preparation -- accounted for 23 percent of the jobs lost during the recession, but 49 percent of the jobs gained over the last year, a recent study by the National Employment Law Project found. Higher-wage industries, by contrast, accounted for 40 percent of the jobs lost, but just 14 percent of the jobs gained. In other words, low paying jobs are increasing as a percentage of total jobs, while high-paying jobs are on the decline.
• Meanwhile, the percentage of those working who have part-time jobs and want full-time ones surged in mid-February to 19.6 percent -- almost as high as it was a year ago before the recovery began, according to Gallup numbers. That suggests, of course, that a large number of the new jobs created over the last year are part-time.
• And a recent Wall Street Journal analysis found that even though productivity rose 5.2 percent from mid 2009 to the end of 2010, wages increased by just 0.3 percent. That means only 6 percent of productivity gains were shared with workers. In past recoveries, that figure has averaged 58 percent. This time around, far more of the gains went to shareholders, in the form of profits, which are at record levels.