3 reasons why the stock market is not in a bubble, according to DataTrek
- The stock market is not in a bubble despite its record-setting rally, according to DataTrek cofounder Nicholas Colas.
- In an interview with Reuters TV on Tuesday, Colas argued that the sharp rally in tech stocks like Zoom and Apple can be backed up by improving underlying fundamentals for those companies.
- "I don't think it's a bubble at a macro level," Colas said.
- Here are 3 reasons why the stock market is not in a bubble, according to Colas.
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As investors continue to bid up stocks to record highs day after day, some worry that a bubble akin to the dot-com era may be forming, especially in the technology sector.
But according to DataTrek cofounder Nicholas Colas, the stock market is not in a bubble.
In an interview with Reuters TV on Tuesday, Colas said, "I don't think it's [the stock market] a bubble at a macro level."
The reasoning behind Colas' statement is based on 3 key datapoints that have historically marked a bubble in previous decades, but are not at extreme levels today.
1. Stock market bubbles have always happened at the mid to late part of a cycle.
2. Stock market bubbles occur when the unemployment rate is very low.
3. Stock market bubbles occur when the labor participation rate is very high.
Right now, none of those 3 factors are occurring.
Many believe the COVID-19 pandemic ended the previous market and economic cycle and we are now at the start of a new cycle that can last for years to come thanks to easy monetary policy from the Fed.
The unemployment rate is currently sitting right above 10%, well off the multi-decade lows seen prior to the pandemic.
The labor participation rate fell sharply amid the COVID-19 pandemic and currently sits at 61.4%, well below the 66% level seen during the dot-com bubble of 2000 and the housing bubble of 2007.
Additionally, strong consumer demand tends to be a key fixture of any stock market bubble.
"You should have very strong levels of consumer demand, because that's what creates the fundamental enthusiasm for stocks. We don't have that right now...so it doesn't feel like a big macro bubble," Colas explained.
And while tech stocks have been all the rage this year, with companies like Apple and Zoom showing impressive year-to-date stock gains, the underlying fundamentals are also improving and can back up the strong performance, Colas said.
"I think there's a lot of enthusiasm about the tech sector that might eventually begin to deflate, but it is not a bubble in the classic sense of the word," Colas explained.
Last month, Colas explained that investors can gauge whether stocks are in a bubble by looking at the VIX index, also known as the fear gauge.
If the VIX manages to fall below the 20 level, investors can rest easy given that an elevated VIX and an elevated stock market tend to signal that a market sell-off may be in the cards.
The VIX currently stands at 28.70 as of Wednesday afternoon.