Asset Bubbles & Forward Returns

Asset bubbles have been prevalent throughout history. Whether it was the “Tulip bubble” in the 1600s, the South Sea bubble of the 1700s, or the bubble of 2000, they were all a result of excessive investor speculation.

Of course, the other side of the inflation was the long unwinding of those bubbles as valuations mean reverted from their previous extremes. Such reversion led to long periods of very low returns for investors, as shown below.

asset bubbles, Asset Bubbles & Forward Returns

Another way to look at valuations and forward returns is with a scatterplot. As you will notice, real total returns over the next decade are near zero at current valuations.

asset bubbles, Asset Bubbles & Forward Returns

While none of this is news, it is a good reminder of where we are currently in the financial cycle. While many hope the last decade’s bull market will continue for another, history suggests such may be a challenge.