The Fed announced it'll hold its target rate steady near zero for now—an appropriate stance in our opinion.
Easy money and fast-rising markets are stirring bubble fear.
But stocks' quick gains are typical of youthful bull markets, and bubbles usually exhibit irrational exuberance—notably missing these days.
New bulls typically leave doubters behind—precisely what's happening now.
On average, bull markets can last much longer and run much further than the recent recovery.
Wednesday's much anticipated Federal Open Markets Committee (FOMC) statement revealed the Fed will hold monetary policy steady. In other news, "Our cat's breath smells like cat food." There weren't many surprises today—but as far as the Fed's concerned, that's a good thing. While benign inflation and low capacity utilization persist, monetary stimulus should continue apace.
Yet accommodative Fed policy is stirring bubble fear for stocks. What could possibly be driving rapid gains but a speculative frenzy detached from reality?
Actually, it's perfectly normal behavior for a bull of this age—and has little to do with bubbles or ebullience. The initial bull bounce off a bear bottom is often as "irrational" on the way up as the last leg of the bear was on the way down—and therefore, can be equally sheer.
Right now, many investors have trouble remembering markets can be irrational in both directions, and often bear market troughs overshoot just as precipitously as overly optimistic bull peaks. A rebound from a bear overshooting isn't a bubble, it's, well, a rebound. Push on a spring, and all else constant, it'll bounce back proportionately once you let go.
Bubble fears might be warranted if the market had already been rising consistently for a couple years—then swiftly shot higher on weakening fundamentals but gaining positive sentiment. But that hardly describes market conditions today. Even after stocks' initial bounce, the economy should strengthen from here or at least prove better than widely expected—not the other way around.
What else discerns a bull's steep beginning from a bubble? Check sentiment. A typical bubble mentality displays delirious ebullience, injudicious fervor, brainless buoyancy, or yes, financial folks' favorite cliché—irrational exuberance. That's when everyone's a tipster and stocks can't lose. Right now, stock market skeptics abound, and those with a positive outlook remain cautiously optimistic.
Equities may eventually run on fumes. But by no means do recent gains assure us that day is nigh. Bull market duration averages 57 months and returns +165%.* That in itself isn't an assurance of gains to come, but is worthy context for where we are today. Also, it helps remind us no bull market is a straight shot up. There will be pullbacks and flattish periods amid the overall upward trend. In those times, plenty of pundits will declare rally's end. We've already had a bout of it—where June's weak returns for many foretold demise. Yet in July and August (so far), stocks continue to charge ahead.
Fretting the fast pace is normal, and any number of theories knocking stocks will arise. But barring a major event out of left field, markets may march on for some time before becoming brainlessly, bubblishly buoyant.
* Source: Historical S&P 500 data from Standard and Poors Index Services. Based on the technical definition that a decline of 20% or more constitutes a bear market.