Ok, I touched on this in my last blog. My main point was that “bubbles” in the stock market aren’t created (nor do they burst) in an environment where everyone is calling for one, or thinks we are already in one. That’s just not how this works.
But, first, what is a “bubble?” Markets going up beyond someone’s expectations is not a bubble. And, while there is no pure definition for what one is, people using the word are intending to reference modern market crashes such as the Dot-com Bubble bursting and creating a multi-year, 50%+ drawdown in markets (particularly technology) from 2000-2002, or a similar scenario in 2007-2009 during the Great Financial Crisis. Yes, those were horrible periods for markets and investors alike, but they were so different and there were many more factors than just stocks being too high. For instance, the 2000-2002 period was largely exacerbated by the horrific attacks of September 11, 2001. Without that, I suspect we wouldn’t keep referencing how awful that period of time was. And, in the Great Financial Crisis, frankly, that wasn’t a stock market event. It was an oil shock that created a consumer recession, which created a real estate recession which culminated with a banking crisis.
So, anytime I hear someone talking about a bubble, my first reaction is that they are trying to sell fear. They typically don’t support their claim with data and just speak in generalities, or they reference some weird statistic that implies conditions are similar to those previous instances that most of us remember well. Bubbles just don’t happen that often, at least at the total stock market level. Sure, there are often pockets of excess that get crushed but that aren’t overly important to the market. Does anyone remember the NFT (Non-fungible Token) phase in 2021? Yeah, you don’t hear much about those these days. And, before anyone suggests the 2022 bear market was a result of the NFT (and Meme stock) silliness in 2021, please remember that the 2022 bear market was almost entirely caused by a combination of massive inflation and a war starting in Europe (Russia/Ukraine) at the same time. There was no “bubble.”
But, this brings me to an important point: Markets correcting doesn’t imply that there was a bubble. We’ve had 3 “bear markets” since January 1, 2020. First was the Covid “crash” that had nothing to do with a market bubble. Second was the 2022 bear market. No bubble there. Most recently was the “Liberation Day” sharp correction in the Spring of this year. None of these were caused by a bubble. They were all caused by things that had nothing to do with the stock market. Markets correct on a regular basis. Bear Markets happen on a fairly regular basis. Bubbles, and the ensuing burst, are very rare and I think we should be much more cautious about throwing that word around.
So, that leads me to my current viewpoint: Probabilities suggest markets end the year higher than they are now. What happens between now and then is anyone’s guess. Frankly, I’ve been (wrongly) suggesting the market could see a decent correction since late Summer. Yes, market levels are elevated. Yes, I think we ran a bit too far and got a bit too complacent in the typically weak months of September and October. But, other than in some very small pockets of the market where a ton of speculation is taking place (such as Nuclear energy stocks), there is nothing to support all of this “bubble” talk in the media. As usual, they just need to scare people to remain relevant, and when stocks have had a good run, the ol’ playbook is to start talking about bubbles. Please ignore the noise. Let’s see where we are in a few months. If there are REAL signs of “irrational exuberance,” excessive risk taking and a bullet-proof mentality, I’ll be one of the first to send out a warning call. But, THOSE are the conditions that lead to bubbles (aka, large, prolonged sell-offs), not everyone and their mama talking about being in one.
Until next time…enjoy the season. Really looking forward to Thanksgiving, which is obviously the best Holiday of the year. 😊
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