Everyone's jumping into the stock market bubble debate lately. Goldman Sachs and Nuveen's Bob Doll both argue confidently that we're not in a bubble.
Stock market veteran Rich Bernstein would agree.
Among other things, Bernstein noted that high-beta stocks are actually trading below their historical valuations. (Beta measures a stock's sensitivity to the market. High beta stocks tend to exhibit amplified moves relative to the market.)
"It seems to us that a necessary condition for an equity bubble is the overvaluation of the stocks most sensitive to the overall stock market’s movement," said Bernstein. "It seems very unrealistic that high beta stocks could be selling at historically conservative valuations if there really was an equity bubble underway."
Bernstein published this chart of price-earnings ratios for high beta stocks and low beta stocks.
Chart 1 shows the relative valuation of the stocks in the S&P 500® with the highest betas (i.e., those stocks with the highest sensitivity to overall market movements) versus that of the stocks with the lowest betas (i.e., those with the lowest sensitivity). Despite claims that the equity market is in a bubble, it is low beta stocks and not high beta stocks that are selling at rich valuations. High beta stocks are actually close to record conservative relative valuations.
It's pretty compelling. As you can see, the high beta stocks traded at significant premiums during the last to bubbles and crashes.
