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Are We in a Bubble Now? What Past Financial Bubbles Can Tell Us

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Chewing gum and soap suds may not appear to have much in common with financial markets, but they all can form bubbles. And when that happens, the fate is also the same: These bubbles can burst.

Of course, there’s a lot more at stake with a financial bubble than the ones you see on your bar of soap. For one, you could stand to lose money if a financial bubble forms and then pops. (As you probably know, this has happened in the past with housing prices and in the stock market.) Recently, there’s been some chatter about another possible bubble in the stock market, and financial markets more broadly. So, are we in one now? Our friends at Goldman Sachs Research took a look at past bubbles to address that burning question.

What is a bubble, exactly?

You can picture a chewing gum bubble, but what does one look like in financial markets or other areas of the economy? Our analysts described them like this: “Bubbles develop when rapid price rises depend solely on hope and possibility, rather than on fundamentals.”

As a bubble grows and prices go up, that could attract even more FOMO-motivated investors who drive prices up further because they don’t want to miss out on potential returns. But those rapid price increases could be unrealistically optimistic about an asset’s future growth prospects, and the risk for investors comes when the bubble inevitably pops.


Investors’ mentality has a lot to do with how bubbles form, and ultimately pop.


There are two important caveats about identifying possible bubbles. Just because prices go up in one market doesn’t necessarily mean there’s a risk to the broader financial system of the economy. And two, not all rapid price increases result in bubbles.

Examples of economic bubbles, from tulips to homes

Investors’ mentality has a lot to do with how bubbles form, and ultimately pop. There’s a crowd psychology that’s often evident in bubble markets – people believe they might miss out on a great opportunity and feel a sense of safety in numbers.

This herd-type mentality causes news of price increases that draw in more investors – which becomes problematic when the bubble eventually bursts because panic can set in and lead to huge price decreases as investors rush to sell.

Let’s take a look at what happened leading up to past financial bubbles, going back to one of the earliest and well-documented ones: Tulip Mania in the 1630s. Between November 1636 and February 1637, the price of some tulip bulbs increased 20-fold. At the bubble’s peak, one bulb could have the same value as a luxury home in Amsterdam.


“The fundamental factors that drive the market and the early stage of the economic cycle would suggest that we are far away from a bubble or bear market.” 


And then we fast forward to more recent bubbles. There’s the 1990s technology bubble in the stock market, which saw some stocks increase in value by more than 1,000%! And many of us remember the mid-2000s housing market bubble, when homebuyers had over-optimistic expectations about future housing prices.

Do all bubbles pop? What else do they have in common? 

The answer to the first question is, yes: all of the historical examples of bubbles eventually popped. But that’s not the only thing they had in common. In fact, according to Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe, there are nine common features of bubbles. He dives into this in a recent podcast episode on Exchanges at Goldman Sachs.

Some of the similarities of those bubbles included:

  • Excessive price increases and extreme valuations
  • Increased market concentration as investors focus on areas of potential high growth
  • Frantic speculation 
  • A backdrop of very low interest rates
  • A new ‘era’ of narrative that builds up
  • The late stages of an economic boom

In addition to the podcast, Oppenheimer and his team analyzed what led to the beginnings of these past bubbles, rather than their endings, and ticked through all of the nine common characteristics to see whether a bubble is currently forming.

Are we in a bubble now?

So, what did our friends in Goldman Sachs research conclude? They believe the risk of an imminent bubble is relatively low. Only some of the common bubble characteristics (like low interest rates and heightened optimism) are currently present in financial markets. And importantly, there’s an absence of significant leverage, or companies and consumers using debt to finance buying assets. “The fundamental factors that drive the market and the early stage of the economic cycle would suggest that we are far away from a bubble or bear market.”

That said, don’t be surprised by bouts of volatility, given how much and how quickly the stock market has recovered since 2020.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.