With recent big dips in the stock market, some people are talking about another market crash. They think the market has become a speculative investment bubble, and it is primed for a sharp downturn. Is this a legitimate worry? NC State University economist Mike Walden answers.
“Speculative bubbles have been with us forever. Ever since there’s been investing there’s been speculative bubbles. And this is a legitimate concern. You do need to worry if what you are investing in, if it’s going up very rapidly, will give back those gains at some point.
“So this is a very interesting area of inquiry, and we now have the benefit of a new study by a couple of economists who looked at data for over 100 years in scores of countries. And what they were after is two things: They wanted to know if you have, for example, a particular stock that had a big gain over a short period of time, in what percentage of time would that stock give back that gain? And then likewise, or on the other hand, if you had a stock that suffered a big drop, what percentage of the time would that loss be recovered.
“They found, for example, that a stock that had an increase of over 100 percent of its value in five years actually gave back those gains only 15 percent of the time — only 15 percent of the time. Also they found that if for a particular stock that suffered a 100 percent drop, in 26 percent of the time, that stock will recover all the loss over the next five years.
“So what this says is, yes, there are speculative bubbles, and you do have to worry about them. But actually what goes up does not necessarily have to come down.”