I continue to have a problem with the characterization Great Stock Market Bubble. Yes there were abuses, some .coms, Enron, Worldcom, IPO laddering etc. But by and large most publicy traded companies were producing valuable goods and services for growing telecom/computer, biotech, etc sectors. It wasn't a bubble. It was real growth with some vastly overvalued stocks that would ultimately have been surgically taken out by the market.
But to lament that if only ...would have just held tight overlooks the reality of Greenspan's excessive ham-handedness in 1999, 2000, 2001 that first pumped and then killed interest-rate sensitive capital intensive industries, coupled with a tax code that confiscates gains (both real and unrealized) and converts what were 'paper' profits (of investors who otherwise were holding tight) into cash in government coffers which is then routed into non-producing sectors...is outright clinical denial.
I agree. It was more like a delusional mania. Counting page views and eyeballs as future earnings or falsely believing that new age structured financing that would eliminate the business cycle was pie in the sky day dreaming.
Richard W.
The Nasdaq fell from ~5000 to ~1120. It has recovered some and is now at 1422. The S&P fell from ~1500 to ~800 and is now at 912. I would call the Nasdaq run up a delusional mania and the S&P a bubble.
The reference to the bubble is not to the quality or character of the business activities of the publically traded companies but to the price at which their stock was traded.
I tend to be a little more narrowly focused because I spent the better part of 30 years buying and selling companies with and for law clients. But price and valuation turn on what you can make with the business assets; as price and valuation of public companies turns on what the company can earn.
Historically, we have measured those values first as the ratio of the price to next years expected earnings; and often by dividend return; or price to sales; or price to gross margin; or cash flow or other elements.
Prechter has a scatter chart he publishes showing the P/E for every year for the last two hundred years. All years prior to 1990 fit in a tiny one or two inch box on the bottom left hand corner of an 8 1/2 x 11 inch pages; the 1990's occupy the rest of the page all the way out to the very tip of the upper right hand corner.
There was a price bubble because valuations were so excessive by historical standards as to defy rational description. Valuations are still at those levels.
Last time we saw a similiar situation was the 1920's. Valuations were excessive for the same cause but not so extreme.
Cause was, in the 1920's, fed printed money (credits) and made them available to the brokers as margin debt funding, permitting stock buyers to use the money to bid up the stock prices. In the 1990's the liquidty got to stock buyers through margin debt, residential mortgage debt, and debt on a whole bunch of other assets. Same result. We had a bubble because the fed created too much liquidity which was used to buy up the paper financial asset of choice--common stock.