The rocketing in the price of bitcoin (BTC-USD), volatility in meme stocks like GameStop (GME) and generally high valuations for stocks has led many investors to ask whether stocks are in a bubble. One veteran investor says these three criteria for a bubble aren’t currently being met.
“One, of course, is widespread optimism,” Hugh Johnson, chairman and chief economist at Hugh Johnson Advisors, told Yahoo Finance Live. “Optimism has increased, but it certainly is not what I would call exuberant and it certainly hasn’t gotten to the point where we would call it euphoria, which is characteristic of a bubble.”
There are many different ways to measure investor sentiment, from the S&P 500 put/call ratio to newsletter writers’ bearishness versus bullishness. The CBOE put/call ratio — the number of bearish options bets on stocks relative to bullish ones — is currently around 0.42, compared with the average of about 0.6 since 1997, according to Bloomberg data.
Johnson’s second criteria is valuation. The S&P 500 is valued at 32 times last year’s earnings, according to Bloomberg data, although that drops to 22 for this year’s estimated earnings. The average price-to-earnings ratio over the past 30 years is around 20.
“I think we’re about 6% overvalued, but it is certainly not extreme,” Johnson said.
Then there’s the question of debt, or how much traders are borrowing to execute their transactions.
“The final thing, which is probably the most important of them all, is leverage. The level of margin debt relative to the entire market is quite frankly nowhere where we saw in the 2000 dot-com bubble.”
All of that said, Johnson does think there are isolated bubbles in the market, particularly in assets like bitcoin. There, though, it’s tougher to apply the traditional criteria, and more of a know-it-when-you-see-it feeling.
