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One can argue that the current stock-market bubble isn’t as big as the one that burst in 2000, when the dot-com implosion occurred. But so what? A bubble is still a bubble. But how do you define a bubble? Here are the five ways.
Price
The FAANGM stocks (Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc., Google (Alphabet Inc.) and Microsoft Corp.) soared 50 per cent in 15 weeks. That is completely abnormal. As is the 30-per-cent gap between the level of the Nasdaq and its 200-day moving average heading into last Thursday’s correction (the index is down 6.2 per cent from Wednesday’s close). The 15-per-cent gap we had last week between the S&P 500 and its 200-day trendline classified as a 2.5 standard deviation event.
Valuation
The S&P 500’s trailing P/E multiple has soared to 29.8x from 18.6x in March. The cyclically adjusted price-to-earnings ratio (CAPE) multiple has expanded from 24.8x to 30.6x — right where we were in February this year. Consider that at the market peak in October 2007, the CAPE was 27.3x. We are in bubble territory. Trailing or forward, valuation multiples last week on the S&P 500 were in the top 0.5 per cent of all time.