Troubles With Bubbles

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Since 1999, earnings for S&P 500 companies have grown more than 200% while the price level is now only 60% higher.

The 17th century is often referred to as the Dutch Golden Age because during this time period, the economy of the Netherlands soared – primarily due to their expansion of trade across the world. In fact, Amsterdam was one of the richest cities in Europe between 1600 and 1700 due to the Dutch dominance in global trade. In the mid-1500’s an exotic flower was brought to Holland from the east. It was a tulip. The rare and elegant flower soon became a status symbol. Soaring demand created tulip traders. As the growing season was limited, tulip derivatives contracts were created. Popularity and prices soared until a single tulip bulb was worth about 10 times a craftsman’s annual salary. It is approximated that tulip flippers could rake in an estimated equivalent of $60,000 per month. No wonder farmers were selling their houses, animals, and heirlooms for a single bulb! Then one day in 1636, the music stopped. Panic ensued, sellers overwhelmed the market and prices dropped to the floor. The Tulipmania bubble popping sent the Dutch economy into recession for several years. A bubble is an irrational sharp increase in prices based on the greater fool theory, not economic fundamentals. The trouble with bubbles is that they can persist for years, confounding investors, and you don’t know just when they will pop. Does this remind you of anything? Hint: it’s not Beanie Babies. That one already popped. And it’s not the market – corporate earnings levels are supportive of these price levels. Please compare earnings to prices on page 7 of the Global Perspectives™ book and watch Karyn Cavanaugh’s latest comments on the market.

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