November 15, 2022

Market Trends


Every asset bubble has common issues and leads to a scramble to identify which bubble we’re in. After all, if you identify which bubble this is like, you might be able to identify the outcome. BMO Capital Markets shared the similarities of this cycle with five major booms and busts. Here’s what’s similar, and what isn’t.

Post-War (late 1940s)

The pandemic is frequently compared to the post-war shock. As activity resumed supply shortages resulted in surging inflation. The bank estimates equities fell 26% from 1946 to 1949. 

Off the bat, BMO argues it’s a bad comparison. “… the scale of that disruption and the burst in U.S. inflation to above 20% y/y make that a much more extreme episode than today’s,” said Robert Kavcic, a senior economist at BMO.

1970s Inflation

Many are drawing parallels between today’s out-of-control inflation and the 1970s/80s. An economic shock, oil shortage, and soaring inflation sound all too familiar. Naturally, many people will think we’re seeing a repeat. 

“A lot went wrong in the 1970s, and arguably there were a number of episodes packed into this period,” he said. Adding, “ultimately, inflation peaked just under 15% by the early 80s before the Fed broke its back, and equities went nowhere in nominal terms for 14 years starting in 1968.”

How many people see 14 years of stagnation coming up? Or even 15% inflation? Willing to bet not too many. Though, it’s hard to see how many people saw those conditions at the time. Risk happens fast.

1990s Bubble 

Today’s monetary tightening is the fastest since the early 90s, drawing similar comparisons. BMO notes it was the last time the US Federal Reserve used a 75 basis point (bp) hike in a single meeting. Equities fell less than 10%, meaning the stock market didn’t even print a technical correction. Heck, it even recovered 12 months later, while inflation stayed within a stable range of 2.5% to 3% the whole time. 

Early action from the US Federal Reserve means they were able to minimize damage. “… the Fed was able to stop before inverting the yield curve—not so this time,” he said.

The 2000s tech bubble

Rapidly changing technology and loose monetary policy? Hey, we have that right now. BMO compares today’s FAANG stocks to the telecom/software boom of that era. Crypto’s speculative bubble also resembles the leap of faith seen during the 2000s.

 “…while equity valuations certainly exploded this cycle, they didn’t reach the extremes seen in early-2000. On the other hand, there is a much tougher underlying inflation battle for the Fed to grapple with today, beyond just pricking an asset-price bubble,” he argues. 

Housing Downturn of 2008 and 1989 

The 2008 comparison is probably the one we see most often, but today is very different. BMO warns home prices on the Case-Shiller jumped 21% at the 2022-high. That tops even the sharpest gain seen pre-financial crisis. Similarly, Canada’s stretched valuations and supply-side arguments resemble the 80s bubble. 

BMO sees a correction through 2023, so home prices are definitely overvalued. However, they don’t see this spreading to the broader financial system, like in 2008.

“… a lot of other things went wrong to make the cycle so difficult, including much higher real interest rates, a demographic drain which we don’t see any sign of today, and currency/fiscal crises,” said Kavic. 

The takeaway? History rhymes, but it doesn’t repeat. There are a lot of similar issues observed today, however, they aren’t exactly the same. This means the solution and outcome will be very different, regardless of how similar it looks to the ghost of bubbles past. 

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