Bubble, Bubble, Bubble…
If you spend any time reading financial media (Wall Street Journal, Yahoo Finance, Forbes, etc) you will come across articles espousing the idea that a stock market bubble is here or just around the corner. And that a stock market crash will follow right after.
Now this is a bubble.
So let me be clear. A stock market crash will come (though I don’t think it’s coming any time soon, I think it’s at least a year away).
But a stock market bubble? No, we’re not going to see a stock market bubble for many years, and quite possibly more than a decade.
So why are all these financial news writers obsessed with calling the next stock market bubble? Well, it makes for an easy article which draws eyeballs. A writer has a deadline and doesn’t want to do any real research, so they just whip out a “stock market bubble” article.
Plus if they’re right, and a month after their “bubble” article the stock market does crash, they look like a genius (but of course, with “bubble” articles written daily on financial media sites, it’s just the law of averages one of these folks will get lucky with timing). And on the flip-side if they’re wrong with their bubble call, no one will even remember the article (that’s risk-reward gold right there career-wise).
A Little Bubble History
All the recent “bubble talk” in the media actually goes back to the last stock market crash in 2008. That’s right, pretty much as soon as the market bounced off its 50% drop in 2008, people were saying the market looked like a bubble (to be more precise, the market peaked in October 2007, fell all through 2008, and bottomed in March 2009).
But here’s the thing, the 2008 stock market crash was not the result of a stock market bubble. You know what a stock market bubble looks like? Just look to the late 1990′s.
In the late 1990′s, or in fact the entire 1990′s, we saw strong, steady gains in the stock market. The gains covered every sector of the market from the bluest of blue chips to the most speculative of technology companies. Annual stock market gains of 20% were expected by every Tom, Dick and Jane in the market. Times were good in the 1990′s, they were actually much better than good, they were f&*kng amazing! It was as easy as stick your money in an indexed mutual fund and watch it grow by 20% year after year. This type of market made everyone feel like a genius, it gave everyone extreme levels of confidence to put all of their investment and retirement money in the stock market and just watch it grow grow grow. How do you not feel like a financial genius in a market like that? And in the 1990′s you’d hear everybody talking about buying stocks – college kids, friends, the clerks in the golf pro shop, the manager at Little Caesar’s Pizza – no joke.
Compare this 1990′s collective view of the stock market to the circa-2007 view of the stock market. Nobody gave a rat’s ass about the stock market in 2007. Nobody wanted stocks. If you told your friends, family, or coworkers you were putting your 401(k) into stock mutual funds they’d look at you like you just said your retirement plan was to take all your money and go play the slots in Vegas. Stocks were for suckers, that was the view of the stock market in 2007. And if nobody likes stocks, then you don’t have a stock market bubble – by definition.
So No Stock Market Bubble in 2008, So Why Did the Stock Market Crash Then?
Ahhhhh….here’s where things get interesting, and where you can learn a bit about human nature.
There was no bubble in the 2008 stock market because the memories of the 1990′s stock market bubble were still very fresh in people’s minds. Too many people lost huge chunks of money buying eToys.com or some other “.com” disaster just a few years earlier, so there was no way they were going to bid stocks up again to stratospheric, 1000 P/E ratio valuations. “Fool me once,” and all that.
But don’t give people too much credit. They just moved from one bubble to the next, and 2007 just happened to be the year the housing market hit its peak. Folks just traded a stock market bubble for a housing market bubble. Poe-tay-toe, poe-tah-toe. Home prices had never seen a nationwide drop, never, going all the way back to the founding of our country. Then 2007-2009 hit, and drop those house prices did, all across the country. Ouch.
I remember sitting in a Borders Bookstore, and overhearing some 20-something guy (who I’d at first assumed was homeless before overhearing his conversation) telling a friend he ran into how he just bought a house and was flipping it, and how this friend should buy a house and do the same. Hmmmmm, this rekindled memories of overhearing stock market conversations in the late 1990′s while out in public. Or how about a friend of mine telling me a girl he just met at a bar told him she’d get him a loan to buy a house…even though he was very under-employed (working part-time) and was just out of college with huge student loan debt.
Rumors of a Stock Market Bubble Have Been Greatly Exaggerated
In the end, the 2008 stock market crash was caused by the bubble in the housing market, not by a bubble in the stock market.
And this is how the next stock market crash will occur – there will be a bubble in another market, a very big market (government bonds, currency, or some other over-investment scenario), and when the chickens come home to roost in that market, the stock market will pay the price too with a huge drop.