While die-hard tech stock fans are positing that the recent rally means the worst is over and the boom is back, the latest rebound is more likely an “echo bubble”—a short-lived surge that is a last gasp in a drawn-out bubble burst, contends an article in Financial Times. And while the bubble of the last decade reached into every kind of asset across the market, it was concentrated in a select handful of sectors such as tech, crypto, and Chinese internet stocks, which all peaked in 2021. Once inflation came roaring back last year, and interest rates spiked for the first time in years, the bubble burst in 2022, giving off its first echo with this year’s rally.
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As investors speculated that interest rates could start to lower sooner rather than later, tech stocks bloomed once again, with big names such as Spotify and Lyft up 40%, Tesla up over 20%, and the FANGs (Facebook, Amazon, Netflix, and Google) up over 30%. But it’s a “classic” echo bubble, the article maintains, driven by investors who want to return to the stocks that once made them a lot of money. The pattern can be seen in the top 10 bubbles going all the way back to the 1920s, which saw prices at least double in the last 12 months before peaking and then decline in the face of tightening policies—the same scenario as today’s market. Past bubbles have generally hit bottom 3 years after the peak, when prices have fallen about 70%. But all of those top 10 bubbles experienced a few echo bubbles on the long way down, where prices surged at least 20% before falling again within 3 months.
Still, tech funds are still drawing in investors, with many believing that everything from innovation to crypto to the FANGs are back. And echo bubbles have a tendency to feed into false hope; during the Dotcom bust, three echo bubbles between 2000 and 2002, with gains as much as 50% in the Nasdaq, revived enthusiasm only to see those hopes dashed. In fact, out of those top 10 bubbles, 4 still have not regained their peaks, including Japanese and Chinese stocks, which peaked in 1989 and 2015, respectively. Indeed, even Microsoft took 14 years to climb back up to its peak after the Dotcom bust. And investors would do better to move on to other corners of the market; after all, the market evolves, and so should people. Historical data shows that investors are more likely to make money in sectors that were not swept up in the latest bubble, the article concludes.
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