How to spot a bubble

IS THE US stock market or, for that matter, many stock markets around the world, in bubble territory? The rise and rise of the Dow Jones Industrial index from one all-time high to another feels a bit giddying. But why stop at the Dow? The Straits Times Index is at an 18-year high. It is less than a couple of hundred points – or just 5 per cent – away from an all-time high of 3,906 points, thanks to some outstanding performances from Singapore’s three banks.

Elsewhere, the rise of the UK’s FTSE 100, India’s Nifty 50, US’ Nasdaq, and the Kuala Lumpur Composite Index has been almost exponential. Are stock markets here in Singapore and elsewhere around the world too frothy?

Investing bubbles have always existed. The phenomenon goes as far back as 1623 when Tulipomania gripped the Netherlands. At that time, a single tulip bulb was selling for seven times the average annual wage. What’s more, tulip farmers were selling flowers that hadn’t even been planted yet. It sounds like buying off-plan condominiums in China at the height of the property boom. And we all know how that has ended.