Economic bubbles are considered a period of rapid appreciation of market value. Bubbles are best defined looking back. The problem with bubbles is that assets that are significantly overvalued often come back down to earth. Investors may be stuck with a stock that they bought when the bubble was at its high. They would have to make the decision to take the loss or to wait for the growth that they anticipated that that company would have.
The most recent examples of bubbles have been the infamous “dot com” bubble in 1999-2001 and the housing bubble of 2008-2009. The dot com bubble was defined by investors putting their money into any internet company when they IPO’ed. The housing bubble, on the other hand, was a bit more complicated. It began from mortgage debt becoming too much of a burden as well as the investors losing on their investments in Collateralized Debt Obligations (CDOs). Even though the economy has been hurt from the coronavirus shutdowns, the stock market has recovered and then some. The market has soared for a while save for at the end of March and Quarter 2 in 2020. This leads to the question: is the market in a bubble? I believe so. DoorDash and AirBnB are two examples from this past month of the bubble. DoorDash and Airbnb finished their first day of trading up 85% and 112% respectively. This led to Jim Cramer calling the IPO process “definitely broken.” He did not go as to far as saying that the market is broken. These two examples show the market is nearing a period similar to the dot com bubble era. It’s not necessarily a bad thing, but buyer beware: all bubbles pop.
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