It’s no secret that there has been an incredible increase in interest in the stock market lately. Unlike the nearly-record lows of the first and second quarters in 2020, today’s stock market has been dubbed a super bull market by many analysts. Investors have been eager to invest in a wide range of securities, ranging from cryptocurrencies to remarkably affordable tech stock that are undervalued.
However, despite this, there’s also a considerable amount of concern as to if this current optimism is viable, or if it’s about to crumble under its unsupported weight. After all, all signs should point to a bearish market: inflation is up, the economy is currently still incredibly unstable, and even the VIX can’t seem to make up its mind as to if it wants to be up or down. Because of this, many people are wondering if the bullish market is unsustainable, and if there’s a bubble that’s about to pop.
Indeed, it wouldn’t be the first time that a bubble has happened, and it’s fairly likely that we’re in the midst of one right now. However, before you start to worry unnecessarily, it’s important to compare the current market to past ones to determine if it’ll continue to climb — or if it’ll all come crashing down, just like it has done before. To help shed some light on this phenomenon, here are three infamous asset bubbles that have left their mark on trade history.
The Dutch Tulip Mania
When most people think of commodities, the first thing that comes to mind probably isn’t flowers. However, tulips are to blame for one of the earliest bubbles that have happened in the past. Back in the mid-1630s, tulips unexpectedly came into popularity. This arose out of the Dutch’s unabashed love of these flowers, and collectors were eager to collect a wide assortment of colors and species.
Because of this sudden uptick in interest in tulip bulbs, wealthy individuals started to snatch these bulbs. Soon after, lower and middle-class families were drawn into the excitement, and the price of tulip bulbs soared. Between 1636 and 1637, the market reached its peak, and it wasn’t unheard of for families to mortgage their homes to get more bulbs.
Then, without warning, consumer confidence in these bulbs unexpectedly fizzled out. Around springtime of 1637, the market for tulip bulbs crashed. People who had once been bulb-wealthy found themselves facing serious poverty, and they were completely unable to sell their tulip bulbs. Finally, the government ruled that the tulip contracts could be terminated — at just 3.5% of the agreed-upon price.
The Roaring Twenties
Everyone has heard of The Roaring Twenties, as well as the Great Depression which followed, but did you know that this was also the result of a bubble? Back in the 1920s, the economy was thriving following WWI. With new administration policies (such as an extension of free trade, the implementation of anti-inflation measures, and fewer antitrust laws), worker productivity and innovation soared.
However, as it turned out, there was a dark side to this incredible growth. The actual impetus was related to the growing use of leverage, by both corporations and individuals. Consumer credit was great for encouraging new purchases, but it also led to mounting debt for many. It was also used for the purchase of stocks, and investors set their sights on margin loans to invest in emerging technologies.
September 03, 1929, signaled the stock market’s 52-week high, and just like that, the bubble slowly started to deflate. The pop itself happened on October 24th — nearly a month later — a day that went down in history books as “Black Thursday.” As a result of the panic, nearly 13 million shares were traded. The rest, as they say, was history.
The US Housing Crisis
Finally, one of the most recent bubbles occurred back in the late 2000s. Many investors in the United States turned their attention to real estate. They were innocently naive and misguided, as they had mistakenly believed that this was a much safer class of assets. After all, real estate was a tangible asset, and everyone needed a home, right?
Housing prices soared between 1996 and 2006, nearly doubling. However, even as these prices increased, signs started to point toward instability. While many people became incredibly wealthy during this timeframe, these weren’t necessarily honest gains. There was an appalling glut of mortgage fraud and many people tried to capitalize on flipping properties, all of which were purchased with subprime lending.
This continued until right about 2006, when a seemingly inevitable slide led to nearly all homes in the United States losing a third of their value by 2009. The housing bubble had popped, and all of the mortgage-backed securities crumbled, too. The shockwaves of this bubble breaking were felt around the globe, leading to a serious recession that undoubtedly rivaled the Great Depression.
Are We In the Black?
There’s no real rhyme or reason to today’s almost jubilant stock market. Meme stocks seem to be the gold standard, fresh-faced investors are gaining the upper hand, and we’re seeing a new generation of day traders competing with the buy-and-hold demographic. Does this necessarily mean that we’re in a bubble, though? While that still remains to be seen, one thing is for certain: Now isn’t the time to short … but that day may be coming sooner than you realize.
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Interesting article. I think we are headed for another crash very soon.
People might speculate less if they stopped trying to be someone they’re not. If you’re not “somebody” without material things, you won’t be “somebody” with them.
In 1980, I was a young engineering co-op at Texaco. Seiko watches were all the rage of people seeking to flash status. A Seiko cost more than two days of a beginning engineer’s net pay. One day, a coworker told me, “That’s a really nice watch. I like that watch. Is it a Seiko?”.
I said, “No, it’s a Timex made in USA that I bought at Walgreens.”.
When investing, “Pigs get fed, and hogs get slaughtered.”. Greed will get you every time.