(Note to the reader: I originally posted this piece in mid-March of 2020. Now I’m reviewing it at the end of April 2026. Hit the nail on the head, didn’t I?)
I’m sure you’ve heard the term before: asset bubble. Sounds ominous, because a bubble is generally something that’s going to pop. On the other hand, I think of bubbles with champagne. So there are two images, both conjuring up a party that has to end at some time.
What does the term refer to in terms of market valuations? It means simply that at some point assets will be trading at a price that’s too high, and that the price will come down — maybe gradually, or maybe by a pop. Why is there so much in the financial literature about asset bubbles? Because there appears to be a big asset bubble in the making.
Correction vs. Recession
Before I go on, let me define two terms:
A market correction is a situation in which prices of assets traded generally decrease. Markets move up and down all day, so movement is normal. But a decrease of, say, 10% is not a common occurrence over the life of the stock market, so when it happens people take notice. Conceptually, the market re-prices itself each day it is open, and given an efficient market hypothesis, most information is already priced in. As I tell clients, just because the price of an underlying asset decreases doesn’t mean the asset itself is no longer valuable. Case in point: you buy a new car and drive it off the lot. The price someone else would pay for that car just dropped by 10%. Does that mean that the value of that vehicle to you has declined? Of course not. Just the underlying price at which the asset might trade has changed — that’s all.
A 10% Correction usually happens about once a year. Sometimes more; sometimes less. My point: when it happens, it is markets functioning normally, and nothing to worry about.
A recession is two quarters of decline in Gross Domestic Product. GDP is the value of all goods and services produced within the boundaries of the 50 states. The point is that a stock market correction does not a recession make.
The Business Cycle
Where I’m heading with all this is to the business cycle. It is normal for an economy to cycle. There is growth up to a peak, then a decline to a trough, and growth back up to another peak. During the times of growth the rising tide lifts all boats, and it is easy to make money. Consumers are spending. At the decline, however, consumers act reasonably — they cut discretionary spending back. During this time luxury manufacturers might suffer. Consumer staples are steady: people will always purchase their prescription drugs, food, and toilet paper. Big-ticket items lead the way out of the trough: at some point one can no longer repair the refrigerator or the car, and it’s time to buy a new one.
So where were we in the business cycle? Enjoying an unprecedentedly long expansion. Financial writers figured the party had to end soon. Prognosticators saw continued expansion of the economy, and thereby stock prices, but with the warning bells that an asset bubble was being created.
The Federal Reserve was in stimulus mode. Interest rates had come down from the highs of 2018, with more loosening anticipated. This meant that money was cheap to borrow. The businessman figured that if capital costs little, this may be a good time to expand the business. The income investor was hurt, though: there was no return on fixed assets. Rates on CDs and money markets were in the toilet. So where did this investor go? Into common stocks — taking on more risk than he wanted just to get some kind of return. This had the effect of bidding up stock prices and potentially creating a bubble.
So was a recession immediately on the horizon? At the time of writing, we thought not. But if another 9/11 happened, or some other large traumatic event, the market could very well get spooked. And we said: look at what’s happened Coronavirus. Big drop in the stock market. But haven’t we seen all this before — with SARS, and Zika, et al.? 2026 Note: We’re seen this twice since I wrote this piece: once with tariffs, and again with Iran.
At CameronDowning we distinguish between money that is for saving, investing, and speculating. We focus on the investing, of course. Saving is for money that belongs in a bank because you have a short time horizon for using it and don’t want any investment risk. Speculating is what you do when you buy a lottery ticket, or a share of a new unproved company. We help our clients invest for the long haul. And as I like to remind people, buy good stuff — because it is still good stuff even if the price changes.
