Vanguard examines the formation of asset bubbles through the lens of historical market cycles, investor behavior, and valuation frameworks. The paper challenges the idea that current markets are definitively in bubble territory, arguing that while valuations are elevated, they may still be supported by low rates and earnings growth. It suggests bubbles are often only clear in hindsight, which complicates real-time positioning.
Asset Bubbles And Where To Find Them
Vanguard
Joe Davis
Research
4 Pages
Key Takeaways
Bubble Identification Difficulty: Vanguard shows that only ~20% of historical bubbles were clearly identifiable in real time before peak valuations.
Valuation Context Matters: Equity valuations above the 90th percentile have historically still delivered positive returns ~60% of the time over the next 5 years.
Interest Rate Influence: Lower rates can justify 20–30% higher equity valuations compared to long-term historical averages, complicating bubble assessments.
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