The markets are alive with the sound of echo bubbles

The writer is chair of Rockefeller International

The recent surge in tech stocks has true believers buzzing that the downturn of late last year is over and the boom of the past decade is back. But the opposite case is more likely. This surge had all the hallmarks of an echo bubble — a brief rebound of the kind that has punctuated the long decline of every major bubble in the past century.

Over the past decade, driven by record-low interest rates, valuations reached historic highs in assets ranging from stocks to bonds and property. It was labelled an “everything bubble.” But the mania was concentrated in certain tech sectors, from crypto to the largest American and Chinese internet stocks, and peaked in 2021.

Then inflation suddenly returned after a long absence, and interest rates rose sharply. The bubble popped late last year, and we have just witnessed the first echo.

Driven by hints that interest rate rises could be coming to an end, tech assets started bouncing back in the past three months. Crypto, including Bitcoin, is up more than 60 per cent; Chinese tech is up more than 50 per cent; profitless tech, which includes names like Spotify and Lyft, is up more than 40 per cent; clean energy, which includes Tesla, is up more than 20 per cent. And the famous US Big Tech “Fangs” (Facebook, Amazon, Netflix and Google) are up more than 30 per cent.

These are classic echo bubbles. Investors refuse to give up on ideas that recently made them a lot of money and so they keep piling back in. The echoes gradually fade away, until serial disappointments kill the faith.

This pattern has repeated itself in the 10 biggest bubbles going back to the US stock market mania of the 1920s, and including big US corporations in the 1960s, commodities in the 1970s, Japanese stocks in the 1980s, US tech in the 1990s, and Chinese shares in the last decade. Typically, the bubble saw prices more than double in the final 12 months before the peak, accompanied by other signs of mania, such as frenzied trading and nosebleed valuations.

In all these cases, the fall was triggered by tightening monetary policy, the same blow hitting markets today. Once prices fell by at least 35 per cent, they were past the point of no return. The bubble typically bottomed out three years after and 70 per cent down from the peak.

On the way down, though, the long fall in the 10 historic bubbles was interrupted by as many as four echo bubbles — surges of at least 20 per cent. On average, the largest echo following each bubble saw a 30 per cent price increase and lasted barely three months before giving up all the gains.

The current bubbles, from crypto to the Fangs, track this historic pattern. Before their 2021 peaks, they all saw prices more than double — often much more — in the final 12 months. Since the peak they have all fallen by more than 35 per cent. Yet true believers have not given up the faith.

Popular tech funds are still attracting inflows. Chatter about the next “innovation platforms” is back. Tech faltered last week, suggesting that the current echoes may be fading, but that doesn’t mean there are not more to come.

Echo bubbles are known to reignite false hopes, often repeatedly. The dotcom bust between 2000 and 2002 was punctuated by three echo bubbles; the biggest saw a nearly 50 per cent increase in the Nasdaq.

Each bounce revived excitement in Silicon Valley, but making profit from a new tech idea takes years if not decades. Big gains off a shrunken base are illusory. After declining by 70 per cent, the Nasdaq needed to rise 250 per cent to return to its peak, and that process would take another 15 years.

Of the 10 historic bubbles, four have yet to regain their bubble peak, ranging from Japanese stocks, which peaked in 1989, to Chinese shares in 2015. Of the six that did regain their bubble peaks, the recovery took 15 years on average. After the dotcom bust, even a tech stock as famously steady as Microsoft took 14 years to return to its peak.

When people are as uncertain about the future as they are now, they tend to stick to what they were doing, hoping for the best. But markets move on. The hot bet of the 1960s was the “Nifty 50”, which gave way to commodities in the 1970s, Japan in the 1980s, US tech in the 1990s and so on.

The hopeful noises about comebacks in various corners of tech are the familiar sound of echo bubbles. History suggests money will more likely be made in sectors and stocks that were not caught up in the bubble of the last decade.