Vanguard Chief Economist Joe Davis explains how to spot a market bubble.
I don’t see signs of a bubble at present. And how I would characterize hallmark signs of a market bubble would be not only strong interest and investment through strong trailing cash flows, generally characterized by strong trailing returns, but most importantly, the third most importantly, a deviation, a market deviation from the fundamental value as best can be estimated for that investment or asset class.
If you look in fixed income across the board in munis, corporates, treasuries, there’s been a credible strong trailing returns, and strong cash flow. I’m harder pressed to say that they’re markedly different from where fundamental values would suggest, given the current economic landscape, particularly around corporates and municipals.
When I look at things in the equity market, generally speaking, our long held view is a positive, formative likely outlook for the equity risk premium.
Now within the equity market, we’ve seen very strong interest in those that have a high dividend yield associated with those equity portfolios, so dividend paying stocks, REITs, two areas come to mind. So I continue to have some reservations in terms of the relative attractiveness of those investments versus the broader equity market, and it’s something that we said this time last year as well. But I’m hard pressed to find that there is areas where there’s so much – asset prices are so deviating from the fundamentals that it would really be a strong cautionary note.