What is an Echo Bubble?
To understand the term “echo bubble”, you have to understand what a bubble is. A financial or economic bubble occurs when stocks trade at prices that exceed their intrinsic or true values. A stock trading beyond its true value eventually crashes, resulting in the decline of the stock price. For example, if stock XYZ is trading at $70, but financial analysts determine that the intrinsic value of the stock is $50, the stock is said to be trading in a bubble. Because investors understand that the market eventually will make a correction, resulting in the stock price falling to its true value, they may begin to short sell the stock for the intrinsic value of $50. When massive sales occur, the stock price is driven down further until the bubble bursts. An echo bubble is a smaller bubble that succeeds the collapse of a larger one. When a bubble bursts, the market rallies, which causes prices to climb past their intrinsic values, thereby creating another bubble. Therefore, a bubble that forms
An echo bubble is a situation that occurs after a main bubble in the stock market crashes. Usually after this occurs, there is a short, but temporary, post-bubble rally which takes place within a couple of days, after the crash. This rally is called an echo bubble because it is usually not as pronounced or as long as the original bubble, thus resembling an echo. The echo bubble takes place as investors are still trying to determine what is happening with a market crash. They must answer a number of questions. Is this a temporary situation caused by the failure of one company? Is there a knee-jerk panic reaction that is based in emotion, not good business? When will the market sort itself out? As investors grapple with these questions, the normal course of business must continue. Some, either through their own day-trading practices or perhaps through a financial adviser, may believe they see opportunity. Stocks that looked like a bad value before a crash suddenly look significantly bett
An echo bubble is a sharp but temporary rise in stock prices that soon follows the collapse of a stock market bubble. In other words, a post-bubble rally that becomes another bubble. In relation to the current equity market, an echo bubble would imply that last year’s rally was premature and equity valuations have become stretched. We are not experiencing an echo bubble but, despite the US Federal Reserve’s switch to a monetary tightening policy, the global rally is sustainable and European and UK equity valuations in particular remain attractive. The US economy typically leads the global economy and over the past few months we have witnessed a marked change in sentiment towards the US…
