A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets.
This fast inflation is followed by a quick decrease in value or a contraction, which is sometimes referred to as a "crash" or a "bubble burst."
Typically, a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset's intrinsic value (the price does not align with the fundamentals of the asset).
How does bubble work?
Bubbles are typically attributed to a change in investor behavior, although what causes this change in behavior is debated.
Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate.
Is there a market bubble now? Goldman Sachs answers.
Investors may be growing anxious about the stock market potentially being in a bubble as its climb to new heights continues relatively unabated. Of note, Deutsche Bank's Jim Reid found Google searches for inflation are now at their highest levels since late 2010.
But Goldman Sachs offered up a comforting take to these worrywarts on Monday.
While there are pockets of excessive valuations in equities, and parts of the market are justifiably de-rating as interest rates adjust, in our assessment only a few of these common characteristics are currently present or being partially met. Typical signs of systemic risk, such as increased leverage in the private sector and a collapse in savings, aren't present.
There are signs of complacency and heightened optimism in the market. Nevertheless, the fundamental factors that drive the market and the early stage of the economic cycle would suggest that we are far away from a bubble or bear market.
-Goldman's global equity strategists
Source: Investopedia, Yahoo Finance, Bloomberg