Does former Fed chair Ben Bernanke think the stock market is undervalued?
Bernanke has a new blog post out on Monday. The post deals with inequality, primarily as it relates to Fed policy. On this topic, Bernanke isn’t sure that it’s obvious Fed policy exacerbated any inequality trends.
But in his post, Bernanke also addresses the stock market.
Specifically, Bernanke isn’t so sure stocks are all that expensive.
Stock prices have risen rapidly over the past six years or so, but they were also severely depressed during and just after the financial crisis. Arguably, the Fed’s actions have not led to permanent increases in stock prices, but instead have returned them to trend. To illustrate: From the end of the 2001 recession (2001:q4) through the pre-crisis business cycle peak (2007:q4), the S&P 500 stock price index grew by about 1.2 per cent a quarter. If the index had grown at that same rate from the fourth quarter of 2007 on, it would have averaged about 2123 in the first quarter of this year; its actual value was 2063, a little below that. There are of course many ways to calculate the “normal” level of stock prices, but most would lead to a similar conclusion.
On Monday, the S&P 500 was trading right around 2,105. So, not too far from where Bernanke thinks stock might’ve been, but not all the way back to where you might expect stocks to be had the financial crisis not happened.
Now, of course, this is sort of a silly counterfactual.
The financial crisis did in fact trigger a massive decline in stock prices, and stock prices have risen rapidly, regardless of where past trends might indicate prices would be now.
And it isn’t likely that Bernanke is making a substantive forecast about what the “fair value” of stocks is or ought to be, he’s just sort of putting it out there: there was this trend, it was derailed, but if it hadn’t been (!), the stock market might have done this.
Over the weekend, Business Insider’s Henry Blodget wrote a few posts about how stocks look expensive and about how the increase in margin debt makes things look a bit uncertain for the stock market. And stock market blogger Jesse Felder was also out with a big post last week detailing some indicators that don’t look so great for the continued run of this bull market.
Last week also saw ex-Lehman Brothers CEO Dick Fuld return to the public eye last week, prompting some on Wall Street to ask if this reemergence isn’t something like the sign of a market getting ready to top out as we forget our past mistakes.
And so we head into the summer, and a potential Federal Reserve rate hike, there are certainly some nerves surrounding the stock market. But as Ben Bernanke at least partly sees it, stocks might not even be back to where they should be; or at least to where they were headed, once upon a time.