In the recent month, the stock market has seen historic highs. Today, the DOW Jones Industrial Average is just below 20,000 which is the highest in American History. Since President-elect Trump claimed victory over Hillary Clinton, the stock market has skyrocketed by nearly 2,000 points. However, is the increase in the stock market matched with an equal increase in demand or are expectations from a Trump Administration propping up the market and thus creating a bubble?
According to thebalance.com, an asset bubble “is formed when the prices of an asset, such as housing, stocks, or gold, become over-inflated. Prices rise quickly over a short period and are not supported by underlying demand for the product itself. It’s a bubble when investors bid up the price beyond any real sustainable value. These price spikes often occur when investors all flock to a particular asset class, such as the stock market, real estate or commodities.”
Donald Trump speaks with Frank Zarb, former CEO of the Nasdaq Stock Market, before opening on Sept. 20, 2005. (Photo by Michael Nagle – Getty Images)
This trend of overvalued stocks isn’t the first case in American history. During the 1990’s the technology sector was surging. It wasn’t until the early 2000’s that the United States experienced the tech-bubble. Investors were expecting the technology sector to continue to rise, and more investors joined the already saturated market, consequently pushing prices higher. According to Ben Geier, a times contributor, the NASDAQ “grew from around 1,000 points in 1995 to more than 5,000 in 2000”. When tech companies outputs were not meeting expectations, the market began to collapse.
This was all a result of investors expecting the technology sector to skyrocket. Today, investors are expecting the market as a whole to increase due to a republican, business-friendly administration about to take hold of the reigns. Therefore, stocks are experiencing generous increases.
Can We Stop A Bubble?
The only way to effectively eliminate a bubble is to stimulate demand and equalize the market. Thus, it is very much possible that Trump could create conditions that stimulate business activity enough to pull businesses up to their stock’s intrinsic value. However, if Donald Trump fails to live up to expectations and the economy does not grow at the expected level, investors could become disconcerted and begin selling their stocks. The snowball effect would begin to take over and before anyone could realize what was taking place, the stock market could be in a ‘dot-com bubble situation’ once again.
When Will the Fall Begin?
According to John Edwards, from Investopedia, investors should see an “initial shock occur to the financial system or an inherent structural weakness begin to show.” Thereupon, people sell their assets, the downward spiral begins, and the United States falls into yet another financial recession.