Analysis of an asset bubble

In 2000, the Nasdaq stock market index, in a massive dot-com bubble, hit 5,133. Investors were buying up everything, despite little to no revenue or earnings. By 2002, the index had dropped 78%, which is a decline to 1,129. 

The Nasdaq index did not reach 5,133 again until the summer of 2016; that would essentially be 16 years to break even if someone bought and held. The Japanese stock market index is still below what it was in 1989. 

In 2022, the stock market dropped around 23%. In 2024, it went up around 24%, but the gain was largely confined to massive gains in seven big stocks. From Investor’s Business Daily:

The Magnificent Seven stocks — (AMZN), Apple (AAPL), Google parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) are closing out a huge year, all easily beating the S&P 500 index.

The following is stock information on the “Magnificent Seven” stocks as of February 7, 2024:

Image created by author.

The total capitalization of these seven companies is $13.114 trillion. Is that logical in an economy that totals around $27 trillion?  State and local spending appears to be around $4 trillion, and the U.S. and federal government spending totals around $6 trillion.

Is it logical that prices of these seven stocks remain so high when their price earnings ratio is so high, with some still rising? The current ratio of all S&P 500 stocks is also high at 23.27.

As stock prices soar the so-called experts, investment analysts, just keep raising their target price. And, the dividend rate is also exceptionally low on these seven stocks, especially when an investor can currently get a four to five percent return on fixed income investments with little to no risk.

Is it logical that stocks gained over 24% last year and continue to rise when earnings were only up 1.9% in the last year? From Yahoo Finance on Wednesday:

The S&P 500 (^GSPC) is on pace for earnings per share to grow 1.9% compared to the same quarter a year prior, per FactSet.

Joe Biden says the reason costs are so high is because corporations are greedy. Does a 1.9% increase in profits imply greed, especially when we are told how strong the economy supposedly is?

The housing bubble of 2007 and 2008 was easy to spot. Prices in several areas of the country were rising much faster than incomes. Instead of letting the market settle, many people got creative. We had no document loans and principal only loans. Fannie and Freddie raised their allowable debt to income ratios. Ratings agencies just rated junk mortgages to AAA ratings. Instead of a gradual collapse, we got a crash that almost destroyed our economy. 

Many assets get hyped over the years and crash, like electric car companies or cryptocurrencies; flim-flam artists make a lot of money on hyped products. 

A lot of cryptocurrency creators were essentially selling an idea (what I call air), instead of an actual product, and the creator made money but the investors took big hits:

According to CoinKickoff, from 2013 to 2022, there were 2,383 crypto coin failures. The average lifespan of a cryptocurrency is 15 months and older coins are more likely to fail than new ones. 

Always beware of something that sounds too good to be true.

I have no idea when the bubble will burst—but it will. I would never advise people not to buy stocks. I would just suggest that everyone use their logic and common sense to spread their risk. They should consider how they would react if their stock portfolio took 16 years to recover like the Nasdaq, or 35 years like the Japanese market.

Anyone who believes the bubble will expand and not burst probably believes that Joe Biden and the Democrats suddenly care about a secure border, that politicians and bureaucrats can control temperatures, sea levels, and storm activity, and that Anthony Fauci based his pronouncements on science.

Image: Free image, Pixabay license, no attribution required.

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