- Investor behaviour makes bubbles almost impossible to judge
- ESG-mania, bitcoin frenzy and tech valuations all suggest that the markets are in bubble territory
- Tips for spotting what could stop the surge
Let me paint you a couple of pictures.
Scenario number one. The year is 2025 and a graduate financial journalist on a training programme has pitched a story to his editors: lessons from the 2021 stock market crash. He’s hoping to make a good impression with this story, permanent jobs have been thin on the ground for new graduates since the economy tanked. Digging through the archives throws up plenty of juicy content: overhyped ‘ethical’ stocks, a flurry of tech-focused IPOs among companies with no hope of profits, bitcoin-mania and social media speculation. ‘How did they not see this crash coming?’ he wonders.
Scenario number two. A 25-year-old millionaire has just bought a Tesla using bitcoin. “It’s funny”, he thinks, “this bitcoin cost £500 just five years ago, now in 2025 it has bought me the latest Model 3.” The millionaire never went to university – why bother when you can make your money creating valuable digital assets with non-fungible tokens? He’s thinking of floating one of his many digital platforms on the stock market – maybe he’ll assess potential investors’ appetite for it in Roblox later?
In early 2021, both scenarios are plausible. US stock markets are hitting new highs daily and even traditionally risk-averse UK investors have started to gain an appetite for hot tech IPOs – the lows of the Covid-19 sell-off (23 March 2020) have become a blip in the market’s relentless march upwards. Meanwhile, a herd of new (mostly younger, mostly male) investors have charged into stocks, helped by the ease and low cost of new investment platforms. And the same excited new investors have been joined in the bitcoin market by reputable investors and large companies.
And so, questions are rightly being asked about how long the surge can continue.
The problem with bubbles is that they are impossible to judge at the time. We can learn from bubbles gone by: markets tend to fail in much the same way time and time again and there are often similarities to be found in previous periods of turbulence. But if even Isaac Newton couldn’t spot ‘the original bubble’ of the South Sea. What hope do the rest of us have?
It’s hardly surprising that bubbles are hard to judge. Stock market movements reflect the minds of investors – who are a notoriously tricky group to understand. Indeed, in the wake of the South Sea collapse Newton reportedly bemoaned his poor fortune: “I can calculate the motions of heavenly…
Read more:Are global stock markets in a bubble?