Let’s talk about our bloated stock market that’s gone from 6600 on the Dow in 2009 to today’s new high of 15572 in only 4 years, while economic growth and prosperity has seen barely any improvement to speak of. So the question I posed was, “How do you know when a market is a bubble that’s close to bursting?” Now many people smarter than I would argue that bubbles are almost impossible to identify because the very nature of a bubble is that people wildly jump into a particular market, driving prices higher than anyone thought possible. So, in that frenzy it’s hard to see what is real and what is hype. But I think there are some tell-tale signs that I have seen repeat themselves over my 30 year career as a portfolio manager and a financial advisor that I think are worth mentioning. And all of these signs seem to occur close to the top of bubbles:
1) Fear of missing out (herd instinct)
2) Bad News is Good News and Good News is Good news
3) New economic paradigms (no more inflation)
4) When Government is the driving force behind prosperity
So, am I telling you to run for the hills and sell all of your stocks? Not at all, what I am saying is to recognize that we are on borrowed time with this stock market run, and that many of the signs of a bubble are undeniable, and that it is only a matter of time before we will experience another huge downturn.
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