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Is The Stock Market A Bubble Waiting To Burst?

Oct 11, 2017
Originally published on October 11, 2017 12:50 pm
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DAVID GREENE, HOST:

With a few hiccups, the stock market has been on a pretty steady upward climb for the past seven and a half years. Stock prices have more than tripled since this bull market began in March of 2009. Yesterday, the Dow Jones Industrial Average set another record. Nothing in the headlines seems to upset investors these days. Will this continue, or is the market a bubble waiting to burst? Well, these are the moments that cry out for David Wessel. He is director of the Hutchins Center at the Brookings Institution and a contributing correspondent for The Wall Street Journal. Hey there, David.

DAVID WESSEL: Good morning.

GREENE: So what's driving stock prices here? Why are they getting higher and higher?

WESSEL: Well, you know, it's always hard to know why the stock market does what it does. But there are a few good explanations out there. The world economy seems to be in pretty good shape. Corporate profits are strong. Interest rates are low, which is good for stock prices because investors are looking for someplace to put their money they get a better return than in bonds or bank accounts. And then there's Donald Trump. The S&P 500 is up 19 percent since he was elected. You know, for a time, there was this story that he was going to cut taxes, spend a lot on infrastructure, roll back regulation.

Now, the - there's no infrastructure spending plan; tax cut is far from assured. He has rolled back regulation. There's all sorts of business unfriendly developments you'd think would distress the markets - North Korea, questions about the competence of the administration, trade war talk - but none of that seems to shake the stock market. It just keeps going up.

GREENE: So no easy answers for why this is happening necessarily. Are there signs that stock prices could at some point get too high, that we might be approaching a risk of a crash at some point?

WESSEL: Yes. By some measure, stock prices do look high. Bob Shiller, Nobel Prize winner at Yale, compared stock prices to corporate earnings over the past decade, and by his measure, stock prices are higher than at any time in the past century except for the - just before the dot-com bust in the early 2000s. But other people say, oh, there's reasons why that isn't worrisome this time. There's the fact that stock prices went up when the Fed cut interest rates and other central banks did the same thing.

Now that they're raising interest rates, you'd think that logically stock prices would go in the other direction, but the Fed is moving kind of gradually. And then there's the observation that stock prices have been up for so long they're bound to come down. That's true, but the question is when. You know, back in December 1996, Alan Greenspan famously warned about irrational exuberance. The stock market ignored him and kept going up for three years.

GREENE: (Laughter) So predictions are not always right, but I'll ask you to predict. I mean, what - are there things that you could imagine that might trigger some kind of drop?

WESSEL: Yes - war with North Korea would probably do it, some economic bad shock that was mishandled by the government eroding trust in political leaders, some kind of trade war, maybe a financial crisis, this time emanating from China, a big mistake by the Fed. But, you know, even in retrospect, it's hard to pinpoint what leads market sentiment to turn around suddenly even though we know it happens. And here's one - if you're superstitious, some of the very worst days in the stock market occurred in October - 1929, 1987 and 2008.

GREENE: And here we are in October. Thank you for that ominous piece of information, David Wessel. I appreciate it.

WESSEL: You're welcome.

GREENE: He's director of the Hutchins Center at the Brookings Institution, and we always appreciate having him on. Transcript provided by NPR, Copyright NPR.