How to Spot a Bubble (Hint – Keep an Eye Out for Tom Hanks)
The article discusses recent concerns about a potential US equity bubble driven by IPO enthusiasm reminiscent of the late 1990s dotcom mania but argues that current market conditions differ significantly, highlighting that a true bubble is often signaled when an asset's popularity extends beyond financial markets into broader culture, exemplified by Tom Hanks' roles linked to market manias in past decades.
Several financial publications have recently argued that US equities are in a bubble. A bubble is a point in time when the price of an item runs far above its real value, driven in large part by irrational investor enthusiasm for the asset. The catalyst for this recent concern seems to be the spectacular performance of several IPOs (initial public offerings) of internet-driven businesses, including Airbnb (which gained 113% its first day of trading), reminiscent of the dotcom mania of the late 1990s. Also cited as evidence of a bubble is the record $149 billion raised in IPOs this year and investor surveys that now point to a high degree of optimism about stocks. While it is acknowledged that investors have become much more bullish lately, and that bullishness could be a catalyst for a near-term pullback, the argument is made that equities are not in a bubble, and the current environment does not align closely with the late 1990s.
At the company level, the businesses coming public today are typically more established and financially sound than those of the late 1990s. At the macro level, today the Federal Reserve is keeping interest rates low, the economy is early in a new expansion and bull market, and investors have been net sellers of stocks for years. In contrast, in the late 1990s, the Fed was raising rates, the economy was late in an expansion and bull market, investors were net buyers of equities, and enthusiasm for stocks transcended Wall Street.
This brings us to how one might spot a bubble: look out for Tom Hanks. More specifically, when the popularity of any asset transcends its market and bleeds into the wider culture, that’s a sign of a bubble. As it relates to Tom Hanks, consider the late 1990s movie “You’ve Got Mail” (and the unstoppable stock at the time of America Online) and his 1980 role on The Love Boat, where he played a character who had gotten rich investing in gold (which hit an all-time, inflation-adjusted high that year). Markets don’t go straight up, and some volatility could be seen into the new year, but the view is that equities are biased higher in 2021.