“Okay, so Bernanke thinks the S&P 500 rising about 1.2% a quarter (4.9% a year) since the 2001 recession ended in November of that year is fine and means the stock market today is not overvalued. I don’t agree or disagree. I don’t know. But let’s use this same period and rationale to examine nominal home prices…
…From November 1, 2001 (the seasonally adjusted FHFA Housing Purchase Index was 154.56 that month) to December 1, 2007 (218.06), this nationwide, government home price index increased at a compounded annual rate of 5.74%. (The index peaked on March 1, 2007 at 227.01.) I don’t know about you, but 5.74% a year for homes vs. 4.9% a year for stocks doesn’t seem like much of a difference to me? The FHFA index as of March 1, 2015 is 221.0, that equates to a 2.51% annual return since November 1, 2001. So stock prices have recovered more than nominal housing prices. What’s my point? I am not convinced we had a massive housing bubble pre-crisis (in late 2006/early 2007). I think during the 2008/2009 crisis, housing prices (like stocks) were driven down well below their long-term “fair value” by weak borrowers (as a result of non-traditional mortgages and speculators), a panic environment, and short sellers colluding to drive mortgage securities and financial stocks dramatically lower. Once these weaker mortgage borrowers defaulted and their properties were resolved and the short sellers closed out their winning positions, nominal house prices recovered rapidly and significantly and continue to rise to this day. To me that means that, pre-crisis, we didn’t have “massive” bubble in nominal housing prices. Unless, we had and now have again a bubble in everything: stocks, bonds, and homes. This is certainly possible due to the Fed’s easy monetary policies, both pre and post crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Shares Too Pricey? Bernanke Doesn’t Think So
By Kristen Scholer
Ben Bernanke doesn’t seem to think the stock market is too frothy.
In his latest blog post for the Brookings Institution, the former Federal Reserve chairman said the easy-money policies used during his tenure at the central bank have arguably only returned stock prices to “normal” levels.
Mr. Bernanke crunched the numbers and found that the S&P 500 rose by about 1.2% each quarter from the end of the 2001 recession through the fourth quarter of 2007, the precrisis business cycle peak. If the S&P had continued to climb by that same rate, Mr. Bernanke’s math tells him the S&P 500 would have sat at about 2123 in the first quarter of this year. That is three points above its first-quarter top of 2120 in February and 55 points higher than where the index finished the first three months of the year at 2068.
While the former Fed head said there are many ways to calculate the normal level of stock prices, he thinks most would lead to a similar conclusion. “Stock prices have risen rapidly over the past six years or so, but they were also severely depressed during and just after the financial crisis,” Mr. Bernanke wrote on the website of the Washington think tank. “Arguably, the Fed’s actions have not led to permanent increases in stock prices, but instead have returned them to trend.”
Mr. Bernanke’s suggestion that stocks aren’t overvalued stands in contrast to Fed Chairwoman Janet Yellen’s assertion in early May that stock valuations are “quite high.” It also goes against comments from hedge-fund titan Stan Druckenmiller and economist Robert Shiller that stocks are expensive.
The S&P 500’s price/earnings ratio of 16.9 is its highest in more than a decade, according to FactSet. Even though valuations are a concern for investors, stocks have kept climbing in 2015 and some market participants aren’t that worried by their current levels.
But now, those who believe the market still has room to run can claim to have Mr. Bernanke on their side.