Bubble or no, there are some signs that stocks are getting pricey.
Individual investors have been returning to the market, often a sign that stocks are reaching their peak. Individual investors poured $167 billion into stock mutual funds this year, according to data from Lipper. In comparison, large institutional investors like hedge funds, pension funds, endowments and insurance companies have only put in $111 billion.
When stocks are valued using an adjusted price-to-earnings ratio developed by Nobel Prize-winning economist Robert Shiller, they seem even more expensive. Shiller’s adjusted price-to-earnings ratio averages out the S&P 500’s earnings over 10 years, to smooth out the volatility that comes from the booms and busts. Using Shiller’s formula, stocks are currently trading at 24.4 times their previous 10 years’ worth of earnings, well above the historic average of 16.5 going back to the year 1881.
A few Wall Street professionals remain bearish and think stocks are due to fall by 10 percent or more.
“I think a lot of what’s driven the market higher recently is simply momentum,” said Jack Ablin, chief investment officer with BMO Private Bank. Ablin thinks stocks are “10 to 15 percent overvalued” at their current levels.
Then there’s the elephant that won’t leave the room: the Federal Reserve.
The Fed has been buying $85 billion in bonds each month in an effort to keep interest rates low and stimulate the economy. Those purchases have pushed up bond prices and made stocks more attractive in comparison.
The Fed was supposed to start pulling back, or “taper” its purchases, in September. But the central bank surprised investors by voting to delay that move. It isn’t expected to change course until early 2014, at the earliest.
Critics say the stimulus has driven too many people into stocks and inflated prices.
Janet Yellen, who has been nominated to lead the Fed starting next year, told the Senate Banking Committee last week that the Fed will keep a close eye on the issue, but said stocks “are not in bubble territory.”