As of this writing, the Dow Jones Industrial Average and S&P 500 are both trading at record levels. The NASDAQ and TSX meanwhile are just two percent below their recent record highs.
Stocks at record levels is a good thing, it suggests the broader economy is doing well and investors are optimistic. Except in this case, stocks soared higher during the worst economic crisis since the Great Depression and now equities are critically overvalued.
Is the Stock Market in a Bubble?
With the U.S. economy expected to rebound sharply in a post-pandemic environment, stocks are expected to climb even higher. That could be bad news for a stock market that many analysts say is already in a stock market bubble.
And the nosebleed valuations are across the board. Which isn’t the norm. The last two financial crisis were centered on one or two industries. The 2008 stock market crash was rooted in real estate and mortgages. The fuse of the 2000 stock market crash was lit by the Internet, or dotcom bubble.
The 2020 stock market bubble is being fuelled by euphoria about a successful vaccine rollout and the global economy reopening. Despite economic, political, and socioeconomic challenges, stocks across the board are soaring higher.
What Are the Similarities between the 1929 Stock Market Crash and 2021?
The broader stock market has gotten so hot and investors so euphoric, that there are some saying there are eerily parallels between today’s stock market bubble and the 1929 stock market crash.
First, there are more new companies going public than ever before. New listings on the New York Stock Exchange soared from 58 million shares in 1925 to 102 million in 1928. In 1929, the number of new listings on the NYSE hit record levels. Fast forward to the first quarter of 2021 and IPO volumes jumped 85% and proceeds soared 271% on a year-over-year basis.
The number of inexperienced traders has also swelled to record numbers. In 1928 and 1929 brokerage houses opened 599 new offices bringing the total number to more than 1,600. That was more than double the number of brokerage houses operating in 1925.
In 2021, new online trading apps, like Robinhood and E*Trade, which are modern day brokerage houses, are booming. In the first quarter of 2021, Charles Schwab opened 3.2 million new retail investor accounts—more than it opened in all of 2020.
Lastly, the Federal Reserve’s easy monetary policy is helping juice the stock market bubble. In the run-up to the 1929 stock market crash, Benjamin Strong, governor of the Federal Reserve Bank of New York kept interest rates artificially low. For a lot longer than anyone thought he should.
That can’t help but sound familiar. In 2021, Jerome Powell, head of the Federal Reserve, has pledged to keep interest rates near record lows and continue to purchase bonds until the U.S. economy is in better shape.
The modern-day Federal Reserve has also raised its total assets purchases. From just the start of 2020 to today, total assets has ballooned from $4.1 trillion to nearly $8.0 trillion.
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No one can predict when a stock market bubble will burst or how bad it will be. But if history, and the 1929, 2000, 2008, and 2020 stock market crashes are any indicator, it never ends well. Instead of running for the exits, the trading experts at Learn-To-Trade.com can teach you how to make money no matter what the stock market is doing.
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