Enough With The Bubble Talk Already

by: Sy Harding

Summary

There is way too much talk of whether the market is in a bubble or not as a means of determining the current market risk.

There have only been two stock market bubbles in the last 70 years, but 25 serious bear markets, or one on average of every 4.5 years.

Obviously, whether we are in a bubble or not has almost nothing to do with risk of a serious correction or bear market.

So much analysis we see and hear lately is concerned with whether the stock market is in a bubble or not. A sampling of headlines in the last month or so:

  • 'It's Time to Worry About a Stock Market Bubble.'
  • 'Five Warning Signs of a Stock Market Bubble.'
  • 'According to Many Famous Investors U.S. Stocks Are In a Bubble.'
  • 'Stock Market Bubble - These Two Charts Should Scare You.'
  • 'Here's Why U.S. Market Is Not In a Bubble.'
  • 'Facts Do Not Support Bubble Talk.'
  • 'Not in a Bubble Yet So Bull Will Continue to Run For Two More Years.'

Come on, folks.

We had an extremely unusual two bubbles in the first 8 years of the new century, the dotcom/stock market bubble in 2000, and the housing bubble in 2006.

Most investors (and most people writing so continuously about bubbles now) probably heard the word 'bubble' for the first time in their lives in 1999/2000. Yet now whether the market is in a bubble is the way market risk is defined? If we can determine the market is in a bubble we can know we need to get out because it's due for a serious collapse, but if we can determine it is not in a bubble we can be assured the bull market has several more years to go?

Huh?

There have been 25 bear markets over the last 113 years, or one on average of every 4.5 years. The average decline was 36.5%. The ten worst averaged a decline of 49.9%.

How many of those serious bear markets were the result of the market being in a valuation bubble that burst?

Well, there was 1929, and 70 years later there was 2000. You might be able to stretch the requirements enough to call the 1973 top prior to the 1973-74 bear market a bubble, but it would be a stretch.

Bear markets begin, as did the 2007-2009 bear, not due to bubble-level valuations being reached and then bursting, but in anticipation of a slowing economy and potential recession or financial crisis (domestic or global), rising inflation, rising interest rates, global events, or just because the bull runs out of energy. At those times, stocks are usually overvalued, but not to anywhere near bubble proportions.

So historically, the market has reached bubble conditions perhaps once or twice in a lifetime, but experiences a 10% to 20% correction on average of once a year, and a serious bear market on average of every 4.5 years.

Therefore, let's cool down the bubble talk. Bubbles are probably still once in a lifetime events. But either way, whether we are in one or not has almost nothing to do with market risk of serious corrections or bear markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.