Web Wealth: The history of stock-market bubbles
The stock market keeps stretching to new highs. Is it a bubble? And if it is, when will it burst? Bubbles don't announce themselves clearly, so a look back at the history of bubbles is instructive.
The stock market keeps stretching to new highs. Is it a bubble? And if it is, when will it burst? Bubbles don't announce themselves clearly, so a look back at the history of bubbles is instructive.
Booms, burst bubbles, crashes, and other economic upheavals have been going on forever. Harvard Business School offers a collection of case studies on U.S. busts back to the Panic of 1837 and including the famous stock-market bubble of 1925-29 that preceded the Great Depression. It also details the less-well-known real estate bubble that came just before that 1920s market boom and saw empty building lots in Miami being sold 10 times per day. If we only had learned . . .
"Whatever else you might say about today's stock market, it is nowhere near as overheated as it was 14 years ago," Mark Hulbert wrote in this MarketWatch post in April, where he compared the market this year with the tech bust of spring 2000. Hulbert cites a study on market conditions in 2000 and says the current market - at least as of first-quarter 2014 - hasn't shown anywhere near the stress levels of the earlier era in terms of things like the fevered pace of, and returns on, initial public offerings. Still, the author says: "To be sure, equities may be overvalued. And, in any case, the market is more than overdue for a 10% correction."
The trusty Investopedia site describes bubbles. In the dot-com boom, "people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurs," Investopedia says. In general, it says, "bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate. Thus, there is little long-term return on those assets." Those plain-vanilla words explain how a lot of people lose their shirts.
"Bubbles are often hard to detect in real time because there is disagreement over the fundamental value of the asset," adds the glossary at Nasdaq.com, home of the tech-heavy stock-market index that doubled in a year, to peak March 10, 2000, at 5,048.62 points. By October 2002, the index had fallen 78 percent, to 1,114.11, and remains below that long-ago high (it closed at 4,368 on Friday).
Debate rages about theories of market prediction, but author Burton Malkiel, who wrote the book A Random Walk Down Wall Street, says in this post at Forbes.com that "buying and holding a portfolio of broad-based low-cost market index funds - is still the best game in town. Although the market may not always be rational in the short run, it always is over the long haul."