The markets are trading near their all time highs and very likely will continue higher. Today, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is trading at $158.85, +0.95 (0.60%). The all time high reached a few weeks ago was $159.71. While the markets will go higher, it is important to recognize a growing bubble in equities.
Right now, the S&P 500 P/E sits at around 15. This is high historically but not outlandish. While earnings this quarter have generally beat expectations, almost all big companies like International Business Machines Corp. (NYSE:IBM) and 3M Co (NYSE:MMM) have missed on revenue. This tells us that growth is slowing but cost cutting is helping earnings per share beat expectations.
So with growth slowing, how can the market keep going higher? The Federal Reserve has manipulated the yield curve so that there is nowhere else to go for any return on your money. With interest rates stuck at obscene low levels, investors feel they have no other choice than to put money into the stock market.
Is this a good reason to invest? Absolutely not. This is how bubbles are created and this is no different. If the markets break higher we could see another thousand points or more added to the Dow Jones Industrial Average before an epic collapse is signaled. Bubbles in history last a while, getting every average person into the market before the collapse. However, the risk of collapse is lurking each day should the right catalyst hit.