Did Anyone Hear a Pop?
Kiplinger's Personal Finance|May 2021
Investors are worried that stocks are in a bubble— and that it’s going to burst.
ADAM SHELL

THE STOCK MARKET’S YEAR-long boom has been accompanied by a familiar question on Wall Street, one that’s as old as the 17th century and as fresh as this spring’s tulips: Have stock prices been in a bubble destined to pop? Now, the bubble conversation has shifted to whether the air is seeping out, with major market indexes pulling back in March and the tech-heavy Nasdaq flirting with the 10% threshold that marks official correction territory. (Prices and returns in this article are as of March 5.)

Investors should not dismiss the chatter about whether an overinflated market has started to deflate. The Dutch tulip bulb mania in the 1600s wiped out fortunes. Euphoria during the Roaring Twenties led to the 1929 crash and Great Depression. The collapse of Japan’s asset bubble in 1991 resulted in decades-long stagnation. And the end of the internet-stock craze 20 years ago wiped out 80% of the Nasdaq’s value.

Although true bubbles tend to end badly, it’s possible that despite bouts of turbulence, especially in speculative pockets of the market, stocks this time around will resume their upward trajectory. We’ll share some strategies for this challenging market below. But it’s worth noting that bubbles can only be identified in hindsight, and we’re not there yet. Moreover, they can go on longer than you’d think. In late 1996, then–Federal Reserve chairman Alan Greenspan warned of “irrational exuberance,” but stocks kept rising until early 2000.

The weight of the evidence. Bubbles form when irrational investors push prices up to unsustainable levels. The gains are driven by speculation, get-richquick thinking and adrenaline, rather than by time-honored investing fundamentals, such as profits, sales and valuation. Many experts blame a recent surge in speculation on a mountain of cash chasing returns. They point to the Federal Reserve’s easy-money policies and trillions of dollars that Congress has injected into the economy during the pandemic.

Whatever the reason, signs abound of excess, or what analysts call YOLO (you only live once) trading. Examples include videogame retailer GameStop’s social media–fueled boom (up 2,442% in intraday trading from the end of 2020 to January 28) and bust (down 92% by mid February); bitcoin’s 100% early-year gain (for more, see “What to Make of Bitcoin,” on page 34); a surging market for initial public offerings; and Tesla’s brief run above $900 a share, which pushed the electric car maker’s market value to more than $800 billion—10 times greater than General Motors, the biggest U.S. automaker.

This mania reminds some veterans of investors’ infatuation with dot-com stocks in the 2000 bubble. “The crazy stuff we’re seeing today is no different,” says James Stack, editor of the InvesTech Research newsletter. It signals that risks are rising and that investors should tread carefully, he adds. Jeremy Grantham, cofounder of money management firm GMO, says this bull run will go down as “one of the great bubbles of financial history.”

A surefire way for the bubble to pop would be for the economy to overheat, causing inflation and bond yields to spike and forcing the Fed, which has said it will keep rates near zero through 2023, to raise rates sooner. The dive in early March that knocked some highfliers down 15%, 25% and more played out as Treasuries shot up to a one-year high of 1.6%—higher than the 1.5% yield of the S&P 500 index. Higher rates make stocks less attractive compared with bonds and exert downward pressure on growth stocks, whose profits in the future are seen as less valuable today when higher current interest rates get factored in.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM KIPLINGER'S PERSONAL FINANCEView All

The Virtues of Volunteering

My column on fulfilling ways to spend retirement (“Living in Retirement,” April) continues to generate inspirational responses from readers, many of whom have sung the praises of volunteering. You also volunteered the names of additional service groups that you have found rewarding. I’ll cite a number of them for those of you in search of a cause that strikes a chord.

2 mins read
Kiplinger's Personal Finance
June 2021

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months— is the most effective way to improve your retirement security.

10+ mins read
Kiplinger's Personal Finance
June 2021

Finally, on the Brink of Dow 36,000

In early 1998, my American EnterpriseInstitute colleague Kevin Hassett, a well-credentialed academic who would later become chairman of the Council of Economic Advisers during the Trump administration, came to me with an idea. Over the previous three-fourths of a century, stocks had returned an annual average of about 11% and government bonds 5.5%.

5 mins read
Kiplinger's Personal Finance
June 2021

Limit Losses With These ETFs

The catch: You’ll give up some gains in return.

3 mins read
Kiplinger's Personal Finance
June 2021

BET ON INFRASTRUCTURE STOCKS

On the heels of a $1.9 trillion COVID relief bill, President Joe Biden has unveiled a major infrastructure initiative that would spend $2 trillion over eight years, financed in part by an increase in corporate tax rates from 21% to 28%.

3 mins read
Kiplinger's Personal Finance
June 2021

Get Dividends Every Month

One way for income-hungry investors to keep cash flowing is to assemble a portfolio that shells out dividends every month.

3 mins read
Kiplinger's Personal Finance
June 2021

Earn Up to 10% on Your Money

Yields are beginning to lift off. We found great deals for every level of risk.

10+ mins read
Kiplinger's Personal Finance
June 2021

How to Surf the Net More Safely

To help you fight identity theft, consider adding a VPN.

3 mins read
Kiplinger's Personal Finance
May 2021

Tap Home Equity for Extra Income

Home is where the heart is, but it’s also a source of regular income for many retirees.

8 mins read
Kiplinger's Personal Finance
May 2021

THE COMPLETE GUIDE TO CAR RENTALS

Get up to speed on how to snag a deal and avoid pesky fees.

10 mins read
Kiplinger's Personal Finance
May 2021
RELATED STORIES

TESLA POSTS $438M 1Q PROFIT ON STRONG ELECTRIC VEHICLE SALES

Charged up by strong sales of its electric cars and SUVs, Tesla posted its seventh-straight profitable quarter.

3 mins read
AppleMagazine
AppleMagazine #496

AUTO GROUP BACKS GUIDELINES FOR PARTIALLY AUTOMATED VEHICLES

The trade association representing most major automakers is offering guidelines for manufacturers to advertise partially automated driving systems and to make sure drivers are paying attention while using them.

3 mins read
AppleMagazine
AppleMagazine #496

CHIMPLY AMAZING!

Brain-chipped ape plays video game – with its mind!

1 min read
Globe
May 03, 2021

MERCEDES ROLLS OUT LUXURY ELECTRIC CAR IN DUEL WITH TESLA

Daimler AG unveiled a battery-powered counterpart to its top Mercedes-Benz luxury sedan as German carmakers ramp up their challenge to electric upstart Tesla.

1 min read
AppleMagazine
AppleMagazine #495 *Special Edition

SCRUTINY OF TESLA CRASH A SIGN THAT REGULATION MAY BE COMING

The fiery crash of a Tesla near Houston with no one behind the wheel is drawing scrutiny from two federal agencies that could bring new regulation of electronic systems that take on some driving tasks.

4 mins read
AppleMagazine
AppleMagazine #495 *Special Edition

US SENDS TEAM TO DETROIT TO INVESTIGATE TESLA-SEMI CRASH

The U.S. government’s highway safety agency is sending a team to Detroit to investigate a crash involving a Tesla that drove beneath a semitrailer.

2 mins read
AppleMagazine
AppleMagazine #490

TESLA'S NEW MODEL S: THE CAR OF THE FUTURE, HERE TODAY

Though today the company might be one of the world’s most exclusive and innovative, it hasn’t always been an easy road for Tesla and CEO Elon Musk.

9 mins read
AppleMagazine
AppleMagazine #490

Flight School For Robots

A startup is building autonomous cargo planes for FedEx, with the long-term vision of shuttling around people, too

7 mins read
Bloomberg Businessweek
March 15, 2021

Tesla's kiss of confidence sends Bitcoin price skyrocketing

According to Grayscale Bitcoin Trust, Bitcoin price rose 20.6%, its highest since mid-January.

1 min read
Industry Leaders
March 2021

Can Clubhouse Keep The Party Going?

Silicon Valley’s hottest app is getting more than just money from its prominent investors

4 mins read
Bloomberg Businessweek
March 08, 2021