) Research have identified three major episodes—each characterized by sky-high market valuations—that ended in substantial downturns: the late 1990s dot-com bubble, the pre-global financial crisis of 2007, and the speculative surge in 2021.
At its peak, market valuations, measured by metrics like the cyclically adjusted price-to-earnings ratio, were at levels seen only twice more in the following decades. The bubble exemplified how markets can persist in irrational optimism until a catalyst, such as an economic slowdown or rising interest rates, triggers a reversal.
Yet, this calm sowed the seeds of complacency. As economist Hyman Minsky noted, extended stability often leads to destabilizing risk-taking. The collapse, which began with cracks in the subprime mortgage market, was exacerbated by interconnected global financial systems. The Covid-19 pandemic sparked a sharp economic contraction in 2020, but unprecedented monetary and fiscal stimulus spurred a remarkable rebound. By late 2021, asset valuations were soaring across equities, bonds, and cryptocurrencies. The S&P 500 recorded double-digit gains, and speculative assets likereached record highs. This exuberance was tempered in November 2021, when the Federal Reserve acknowledged that inflation was not as transient as initially believed.