Five for Friday

What's a Bubble, Today vs 90's, Diversification, Seasonality, and Happy Birthday

1. Bubble

Aristotle once asked, “How many a dispute could have been deflated if the disputants had dared to define their terms?” This seems relevant today amid the “is the market in a bubble” debate, considering that there is no formal definition for “bubble.” And while arguing over a vague topic makes for great TV ratings, the lack of definitional specificity—and the varying types of bubbles—make analysis trickier. If every rally is a bubble (and every selloff a bubble popping), then the word has no meaning. And so, I thought it might be useful to identify three areas that I am watching to differentiate a bubble from a bull market: 1) A rapid acceleration in price. In a bubble, a price chart’s line is closer to vertical than diagonal (see below); 2) Extreme valuations. Bubbly assets are not just expensive, but trade at “prices that no reasonable future outcome can justify”; and 3) Sentiment. Bubbles tend to feature a powerful narrative paired with broad euphoria—a booming IPO market, “this time is different” justifications, widespread FOMO, etc. It may be harder to identify in real time, but the irrational exuberance of the crowd is, in many ways, a bubble’s defining trait.  

2. Dotcom

Chris Verrone, chief market strategist at Strategas (a Baird company), recently answered the question of whether the market is in a bubble, and concluded with an offhand comment that people forget “how potent late 1999 and early 2000 were.” I couldn’t agree more. The chart to the right shows the Nasdaq 100 in the late 1990s (indexed to Netscape’s IPO) and today (indexed to ChatGPT’s release). For roughly three years, the two markets look similar—strong performance, but no parabolic rise, euphoric sentiment, or FOMO buying associated with a bubble. At some point in the late 1990s, however, things shifted. From Oct. 1998 to Mar. 2000, in just 17 months, the Nasdaq more than quadrupled. Bubbles, as noted above, are hard to define. But if we are comparing today’s AI bull market to the late 1990s boom, the truly bubbly part of the ride has not yet begun.  

3. Hedge

As an exercise, however, let’s assume that we are in a bubble. We can’t control stock prices anymore than we can control the weather, but there are plenty of things that we can control. And if you are in a position where a stock market crash would do serious damage to your financial viability, you can hedge that risk—either directly or by diversifying. From 2000 to 2002, the Nasdaq fell around 75%. But over the same period, Treasury bills rose 11%, Treasury bonds rose 42%, Corporate bonds rose 33%, Real estate rose 28%, and Gold rose 20%. Within equities, U.S. value- and defensive-oriented areas (e.g., Staples, Healthcare) fared far better than growthy, internet-adjacent stocks. And while non-U.S. markets weren’t spared in the selloff, the subsequent years of U.S. dollar weakness catalyzed a half decade of international equity outperformance. Diversification limits upside, sure, but good investing is not about owning the best-performing asset at every turn—it is about reaching goals (and sleeping well at night, too).

4. Seasons

From May through October—the period that the popular “sell in May and go away” market colloquialism would have you avoid—the S&P 500 was up 23%. That comes after the S&P 500 returned 13% over the same period last year (and 10% in 2021, 12% in 2020, 8% in 2017). Seasonal patterns can be useful, but they won’t outweigh bigger market catalysts and drivers. And missing a double-digit pop in just a six-month window is a bad way to build long-term wealth.

5. Happy Birthday

to Marie Curie, the first woman to win the Nobel Prize (and the only person to win prizes in two scientific categories), whose pioneering research in radioactivity—and bravery in implementing it—has saved countless lives.  

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision.  This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2025 Robert W. Baird & Co. Incorporated.

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