The world has already experienced many bubbles. Randomly useless bonds in the 1980s, technology stocks in the 1990s, and housing around the year 2000. They are united by one feature, when they burst, they take the financial system with them.
Let’s take a look if there is another bubble on the markets now.
How to recognize a bubble
It usually starts with a sharp rise in a price of a selected asset, mostly from foreign sources. The investing public will thus try to catch the rise in price and they continue to invest, thus inflating such a bubble. In the end, when the bubble burts, it ends with people losing their money. Usually, however, “classic” bubbles are aimed at one class or on one asset, which, in the event of a burst, ends in disaster. Then there is the so-called everything-bubble, which affects every industry and its rupture can have bad consequences even outside the financial market.
Those who have been on the stock markets for a long time and remember the boom in technological investment probably already know what could happen. The bullish trend that can be observed over the last 10 years roughly corresponds to the growth that caused the bubble to burst 20 years ago. So should we be afraid that the stock market is plunging into the same abyss as before? Is there a bubble we should know about?
Indicators mean bull and bear indicators. Among the bears we can include: S&P 500, volatility index, concentration of market capitalization of the largest S&P companies, stock market entries, Warren Buffett’s ratio, put and call options ratio and debt to cash ratio. The bullish then includes: Fed assets, savings rates and investor sentiment. In this case, it can be said that bearish indicators prevail over the bull indicators. But if you trade against the trend, you know that markets always tend to overcome the wall of fear.
The pressure so far seems to be limited, but it is possible that the economic cycle will grow in the USA, while it will stagnate in Europe. If you would like to learn more about the financial market, bubbles and investments and learn a few things on top, we can recommend the tutorials we have prepared for you.