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Biggest Bursting Bubbles are Long, Painful

August 08, 2022

We’re experiencing a big asset bubble burst – maybe one of the biggest in history – and it could have longer to go.

Over time, the largest bubbles in financial history didn’t end with anything like the S&P 500 Index’s six-month drawdown of 24%, or the NASDAQ Composite Index’s eight-month dip of 33%, as we’ve seen so far this year. The biggest bubble bursts tend to be longer and more painful, making this year’s losses look piddly in comparison:

It would be nice if there was a clear, proven path out of a bubble without suffering a bear market. Unfortunately, there is no blueprint. Given the table above, it seems you just endure the pain.

Intermittent rallies can pop up during these declines, of course. Such jumps tend to be smaller in the beginning of the cycle and larger at the end. So far, the biggest rally in the S&P 500 since it peaked on Jan. 3, 2022, was about 11% from March 14-29. More recently, the S&P 500 rose 6.7% from June 16-24.

These are natural rallies within every bear market. But unlike what many financial pundits declare, the jumps don’t mark a market bottom. Even mentioning “the bottom” shows positive sentiment still exists.

When the bottom is truly looming, nobody will mention it. History suggests a rough average bubble bursting period of 1.5-3 years. If the losses keep mounting, by then investors will have thrown in the towel.

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