U.S. Stock Market Volatility Doesn’t Meet the Criteria for a Bubble
Is it prudent to be anxious or calm when the stock market bubble is being discussed by everyone? With one major exception regarding the current market, the answer from previous bubbles appears to be a combination of the two.
First, there is a caveat. Even though it seems like everyone in the markets is wondering if a bubble is happening, the question isn’t getting much attention in the media or on Google.
Regrettably, this was also the case prior to the massive dot-com crash of 2000, the credit crisis of 2007, and—though the statistics only cover the English language—the Chinese bubble of 2015. There was a dearth of coverage of the bubbles in all three instances until after the fact, when investor portfolios collapsed and a flood of articles and searches about the subjects ensued.
The rationale for loosening up is based on human nature, but this disproves it: If everyone is worried about a bubble, investors will be wary of buying, which will prevent the bubble from growing.
Visual: WSJ See Enlarged Version
Visual: WSJ
Attempting to predict bubbles is fraught with two problems. First, it’s usually easy for anyone paying attention to see a bubble about to pop, but they can’t spread the word to pop it. Newspapers can’t possibly warn their readers about a bubble indefinitely without becoming dull, and investors can’t help but buy stocks when previous warnings have led to even higher prices. When some investors become wealthy while you remain poor is known as a bubble, according to an old joke. Most investors either stop paying attention to the warnings or go in anyhow when that happens frequently enough.
Secondly, it’s normal to adjust one’s beliefs when prices keep going up. Because it is real and because the enormous price increase seems to show that the bears were mistaken, investors and journalists are lured to the grain of truth that the bubble rose from. When bubbles burst, people pay them little mind or even fire them, like prominent tech bear Tony “Dr. Doom” Dye, who was the CIO of a UBS company in March 2000, did. That same month, the dot-com bubble broke, and the underperforming division, having inherited Dye’s positions, became one of the world’s best-performing fund managers.
Despite years of back-seat fear, current prices have developed. This was opined by Barron’s, our sister journal, in 1929, which is a prime example of what happens. Such enduring power seems more like a state of wellness than a fever.
It became clear that the market was really ill when share prices plummeted a month later.
In the dot-com bubble, something analogous occurred. Case in point: in March 2000, a front page article in The Wall Street Journal lauded the “New Economy” technology stocks, claiming they were safe from rising interest rates or oil costs while seeing fast expansion.
“Despite the speculation about a high-tech bubble, the divergence in market values can be explained by a simple logic: High-tech is the sector with the most potential for growth,” it stated.
It has since come to light that the dot-com bubble began to burst two weeks prior to the piece’s publication. After two years, the Nasdaq fell to its lowest point, a decline of about 80%.
The market analysts of today will find this to be unsettling reading. There was a “New Era” in 1929. The advent of mass production and the automobile revolutionized trade and led to unprecedented levels of productivity. Similarly, the “New Economy” that emerged on the web in 1999.
In 2020 and 2021, there was actual government support for sustainable energy, legal cannabis, and commercial space flights, but there was also real support for meme stocks. Because investors are extremely optimistic about the rate and profitability of the improvements, the price becomes the problem in a bubble rather than the tale. When a bubble reaches its peak, investors stop caring about the facts and start caring about who will buy the stock next (meme stocks skipped this step).
The subject of price remains open for investors today. The level of speculation that was evident in 1929, 1999, China in 2015, and some sections of the US in 2020-21 is not apparent to me now. Despite the fact that the extent to which AI improves efficiency is still up for debate due to the apparent shortcomings of present systems, there is a real productivity story to be told about AI.
The historical similarities make me nervous that I’m making the same mistakes in the past by assuming this isn’t a stock bubble just yet, but rather some little froth. Jeremy Grantham, a seasoned bubble watcher from Boston’s GMO, notes that investors expect the good times to continue, as evidenced by high valuations (albeit not on the scale of 2000) and big profits. My guess is that one will have to give, and if they both do, it will be painful. Although my field has a dismal track record when it comes to predicting bubbles, I am relieved that I do not perceive a widespread speculative frenzy in the market at the moment.
