The real-money Inflation-Protected Income Growth portfolio saw yet another gain last week, this time picking up around $711 — or better than 2.3% of the $30,000 it started with in December 2012. The iPIG portfolio closed the week with a total value of $34,940.55, or a better than 16% return in less than half a year.
In ordinary markets, that sort of return would be stupendously strong. But in this market, it was merely so-so. The S&P 500 actually fared a bit better, rising a bit more than 18% in that same time frame. Leaps that fast can almost be expected coming out of a bear market, but stocks have been rising almost nonstop since hitting bottom in early 2009. A gain that large in a bull market that long in the tooth raises the specter of yet another asset bubble.
So is there a bubble?
There is certainly the potential of a bubble. The Federal Reserve’s incredibly loose monetary policy is a key part of the reason stocks are up, as the Fed is holding down interest rates below inflation on “safer” assets like short-term U.S. Treasuries. That forces investors looking for real returns farther out on the risk curve, thus adding fuel to the market’s fire. Should the Fed take its foot off that gas, there’s a very real possibility that stocks will drop a bit in the absence of that strong stimulus.
Still, valuations are nowhere near as high as they were at the peak of the dot.com bubble. Additionally, many companies significantly tightened their cost structures during the recent recession and are seeing improved current profitability as a result. Higher profit levels should naturally translate to higher stock prices, all else being equal.
All told, it’s a mixed bag. And in reality, if a bubble were that easy to project, none would ever form, as people acting in their own self-interest would get out while the getting is good, thus keeping the bubble from inflating in the first place. But whether or not there’s a bubble, the iPIG portfolio is designed around the cash-generating capabilities of the individual companies that it holds, rather than general asset price levels. As long as those operations remain strong, the portfolio should wind up fine.