The recent spike in tech stocks has true believers believing that the downturn of late last year has ended and that the boom of the previous decade has resumed.
This spike had all the signs of an echo bubble — a temporary comeback similar to the ones that have punctuated the protracted decline of every major bubble over the last century.
Valuations in assets ranging from stocks to bonds and property have hit historic highs during the last decade, propelled by record-low interest rates.
It was dubbed the “everything bubble.”
However, the craze was centered in specific tech sectors, ranging from cryptocurrency to the major American and Chinese internet stocks, and peaked in 2021.
Suddenly, after a lengthy absence, inflation reappeared, and interest rates soared dramatically.
The bubble burst late last year, and we are only now hearing the first echo.
Recent Echoes
With signals that interest rate hikes may be coming to an end, tech assets have begun to recover in the last three months.
Crypto, including Bitcoin, is up more than 60%; Chinese tech is up more than 50%; profitless tech, including companies like Spotify and Lyft, is up more than 40%; and renewable energy, including Tesla, is up more than 20% and the famed US Big Tech “Fangs” (Facebook, Amazon, Netflix, and Google) have increased by more than 30%.
These are typical echo bubbles. Investors will not give up on concepts that have lately made them a lot of money, therefore they will continue to pour money into them.
The echoes fade away gradually until a series of disappointments kills the faith.
Historical Bubbles
This trend has been repeated in the ten largest bubbles dating back to the 1920s, including giant American firms in the 1960s, commodities in the 1970s, Japanese equities in the 1980s, US technology in the 1990s, and Chinese shares in the last decade.
Generally, in the final 12 months before the peak, prices more than doubled, followed by other indicators of mania, such as frenetic trading and nosebleed valuations.
In all of these occasions, the downturn was precipitated by tighter monetary policy, the identical blow that markets are currently experiencing.
Prices had passed the point of no return when they fell by at least 35%.
The bubble typically bottomed out three years later and was 70% below its peak.
Yet, the protracted fall in the ten historic bubbles was interrupted by as many as four echo bubbles – spikes of at least 20%.
The largest echo after each bubble witnessed a 30% price increase and lasted only three months before giving up all the gains.
Recent Ones
Current bubbles, from crypto to Fangs, follow this historical trend.
They all saw prices more than double — often much more — in the last year before their 2021 peaks.
They have all dropped by more than 35% since their high.
True believers, however, have not abandoned their faith.
Popular technology funds continue to garner inflows and the discussion about the next “innovation platforms” has returned.
This week, technology faltered, implying that the current echoes may be diminishing, but that doesn’t mean there won’t be more.
Echo bubbles are known to continually rekindle false hopes.
Between 2000 and 2002, the dotcom implosion was punctured by three echo bubbles, the largest of which saw the Nasdaq rise by about 50%.
Each bounce rekindled optimism in Silicon Valley, but profiting from a new technology innovation might take years, if not decades.
Large gains from a reduced base are a mirage.
After falling by 70%, the Nasdaq needed to increase by 25% to return to its peak, a process that would take another 15 years.
What Happens Now
Four of the ten major bubbles have yet to reclaim their peak, ranging from Japanese equities in 1989 to Chinese shares in 2015.
The average recovery time for the six that did regain their bubble peaks was 15 years and even Microsoft, a tech stock known for its stability, needed 14 years to recover from the dotcom bust.
When people are apprehensive about the future, they tend to remain with what they were doing and hope for the best but, markets go on.
The “Nifty 50” was the hot bet in the 1960s, which gave way to commodities in the 1970s, Japan in the 1980s, American technology in the 1990s, and so on.
The familiar sound of echo bubbles is the hopeful sounds about comebacks in various sectors of technology.
History shows that money will be made in areas and equities that were not affected by the last decade’s bubble.
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