May 07, 2015
Matt O’Brien gets the story right. By most measures the stock market is above its normal levels, but given unusually low interest rates, it is not unreasonably priced. The price to earnings ratios are only slightly higher than in 2007, when almost no one thought the market was in a bubble. Back then the interest rate on 10-year Treasury bonds was over 5.0 percent, compared to around 2.0 percent today. That makes today’s market look like a decent buy, but don’t expect high returns.
One point is worth qualifying in O’Brien’s piece. He notes Greenspan’s famous irrational exuberance remark and says it didn’t do much beyond its immediate impact (markets did fall). This is likely because Greenspan backed away from it with doublespeak about how market valuations may be justified if profits accelerated. It would have been interesting to see what would have happened if he doubled down and continued to hit on the point, backed by data from the Fed. Janet Yellen’s foray into attacking bubbles this way last summer suggests that it can work.
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