ago, pretty much everyone agreed that one of the great bubbles was bursting. An era of rock-bottom interest rates was coming to a close, shaking the foundations of just about every asset class. Share prices were plunging, government bonds were being hammered, crypto markets were in freefall. Wall Street’s prophets of doom were crowing with delight.
Cisco therefore illustrates the defining feature of bubbles. They inflate when investors buy assets at prices that are entirely unmoored from economic fundamentals such as supply and demand or future cash flows. The question of what the asset is “worth” goes out the window; all that matters is whether it can later be sold for more. That in turn depends on how many people the speculative frenzy can pull in and how long it can last—in other words, on just how mad the crowd becomes.
The good news is that this sort of mania is some way off. Researchers at Goldman Sachs, a bank, have analysed the valuations of the ten biggest stocks in America’shype has revolved. With prices at an average of 25 times their expected earnings for the coming year, they are on the expensive side. But they are cheaper than they were last year, and a bargain compared with the peak of the dotcom bubble, when prices were 43 times earnings.
There are other tell-tale signs that, in spite of soaring share prices, euphoria is absent. Bank of America’s latest monthly survey of fund managers finds them more bullish than they have been for around two years, but not particularly so by long-term standards. Their average cash holdings are low, but not extremely so, meaning that they have not piled into the market with everything they have .
Similar dangers stalk professional money-managers, whose job is to beat the market whether or not they think it is moving rationally. If pockets look dangerously overvalued, it makes sense to avoid them. But in a bubble, avoiding overvalued stocks—which, after all, are the ones rising the most—starts to look suspiciously like routine mediocrity.