Tags: Colombo | rates | stock | bubble

Economist Colombo: Rising Rates Will Burst 20-Year Stock Bubble

By    |   Monday, 13 April 2015 07:20 AM

You can add economic analyst Jesse Colombo to the list of those who think the stock market has entered bubble territory.

While many would put the start date of the bubble at 2009, he actually says what the stock market is experiencing is just a wave of the bubble that started in the mid-1990s.

And what's going to burst the bubble?

It will end "when the very fuel behind it is removed, which is record low interest rates," he writes in an article for Forbes. The Federal Reserve has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

Colombo sees two ways in which rising rates can pop the bubble.
  • "After several more years of the bubble-driven economic recovery, the Fed has a 'Mission Accomplished' moment and eventually increases the fed funds rate too high, creating a hard landing that pops the post-2009 bubbles," he says. Many economists expect the central bank to begin raising rates in September.
  • "The ballooning and unsustainable amount of government and corporate bond market debt eventually causes investors to jettison bonds en masse, which leads to much higher interest rates."
Federal government debt now totals $18 trillion, about equal to annual GDP.

Meanwhile, as stocks soar around the world, the U.S. market stagnates. The S&P 500 index climbed just 1.6 percent so far this year, the worst performance of any major market index for the period.

The trend is ironic, given that the U.S. economy is in better shape than are most of those overseas. But U.S. stocks have suffered to some extent because of their own six-year rally that has seen the S&P 500 triple.

That has made investors concerned about valuations. The S&P 500 carried a trailing price-earnings ratio of 20.25 as of April 2, up from 17.69 a year ago, according to Birinyi Associates.

And while the U.S. economy is stronger than those overseas are, it slowed down in the last six months. Growth totaled only 2.2 percent in the fourth quarter, and many economists predict it shrank much further in the first quarter.

"I would definitely say investors should take some money off of U.S. large caps and maybe allocate some more into international sectors, particularly Europe and Japan," Erin Gibbs, equity chief investment officer at S&P Capital IQ, tells CNBC.

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You can add economic analyst Jesse Colombo to the list of those who think the stock market has entered bubble territory.
Colombo, rates, stock, bubble
Monday, 13 April 2015 07:20 AM
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