Why a once-in-a-century pandemic and a stock market bubble spell trouble
- It is alarming that today’s bubble has inflated in the face of the worst recession in decades. While the pandemic has been less damaging to markets than the 2008 crisis, there’s huge uncertainty about the strength of the recovery
In a landmark ruling on obscenity by the United States Supreme Court in 1964, Justice Potter Stewart famously refused to define hard-core pornography. He simply said: “I know it when I see it.”
Financial market bubbles are a bit like pornography. Calling the top of a bubble is never easy, partly because many investors deny the presence of one, but also because there is a tendency among bubble-spotters to jump the gun, breeding complacency in the run-up to an eventual bust.
Today’s heated debate about lofty asset prices – particularly the very expensive US stock market – is a perfect example of the risks in timing a market that is plainly in the grips of excessive exuberance, but which could still enjoy further gains in the coming months.
The debate is fiercer this time round because of two unprecedented forces which, for the time being, provide ammunition for bulls and bears alike.
Yet, while the disconnect between frothy markets and a virus-ravaged global economy could persist for some time, signs of speculative excess are glaringly apparent, and have contaminated large parts of the market. Not only are valuations dangerously stretched, the behaviour of investors suggests many traders have lost touch with reality.
