Rational Exuberance

by Laura Ehrenberg-Chesler on May 29, 2013

in Banks,Economic Indicators,housing,Investment Strategies

A common question being asked today about the U.S. stock market is; “Can the market continue to go up, or is the this a bubble about to burst”?  Ed Yardeni thinks there are reasons to believe the market can go higher based on “Rational Exuberance”.

From Ed”s research on May 29th:

Let’s accentuate the positives that justify rational exuberance. I’ve been doing that for the past four years. It’s nice to see that investors are doing the same. Yesterday’s news was especially cheery:


(1) Home prices are heating up. The 12-month moving average of the median existing single-family home price is up 10.5% since it bottomed during February 2012 (Fig. 7). It is still 18.9% below its record high during July 2006. Interestingly, the median price of a new single-family home recently rose to a new all-time high (Fig. 8)! No wonder that housing-related stocks continue to outperform the S&P 500.


(2) Moody’s is more upbeat on banks.Yesterday, Moody”s Investors Service changed the outlook on the US banking industry to stable from negative, citing the continued improvement in economic conditions and reduction in downside risk for banks. The outlook has been negative since the financial crisis of 2008. Debbie and I agree with Moody”s prediction that US GDP growth should be 1.5% to 2.5% this year and next year, with the unemployment rate falling to 7% in the next 6-12 months. “Sustained GDP growth and improving employment conditions will help banks protect their now-stronger balance sheets,” said Sean Jones,

(3) Consumers are more optimistic. Yesterday, we also learned that consumer confidence picked up in May to its highest in more than five years as home prices rebounded, stocks rallied to new highs, and gasoline prices remained stable. The Consumer Confidence Index jumped from 69.0 in April to 76.2 in May, the best level since February 2008. The expectations index rose from 74.3 to 82.4 (the best since October 2012), while the present situation index climbed from 61.0 to 66.7 (the best since May 2008) (Fig. 9). Consumers” assessment of the labor market improved, with the “jobs hard to get” index slipping to 36.1% from 36.9% the month before (Fig. 10). This suggests that the unemployment rate should continue to fall. That should be a big plus for outperforming Consumer Discretionary stocks, including the Retailers.


(4) State finances are improving. Yesterday’s WSJ that states are raising college budgets after years of deep cuts. “Tax revenue in 47 states rose last year, according to Census Bureau data. Government revenue collections for all states increased by an average of 4.5%.” Sunday’s NYT reported: “After years of grueling battles over state budget deficits and spending cuts, California has a new challenge on its hands: too much money. An unexpected surplus is fueling an argument over how the state should respond to its turn of good fortune.” At least seven other states–including Connecticut, Utah, and Wisconsin–have reported budget surpluses in recent weeks.



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