The Oil Bubble Will Meet the Same Fate as Tech, Housing

Over the last ten years the S&P 500 has returned a meager 2.88%. Why? Because in the long run the market doesn’t like bubbles. We’re now in the third wave of bubble euphoria and we’re hearing the same underlying message that we heard during the first two, just in different terms. During the dot-com era we watched tech fly to P/E multiples of 200 and above. When fund mangers were questioned about investing in such companies back in 1999, they collectively responded by saying times had changed. Lofty valuations became the new norm-until they crashed that is. The Nasdaq (QQQQ) still isn’t even half of what it was in 2000. The market’s punishment of the dot-com bubble has lasted for seven years.

Real estate investment shifted into bubble status due to low interest rates and easy lending practices advocated by the Greenspan Federal Reserve. Back in 2005 it was difficult to find anyone who didn’t want to jump into real estate. Flipping homes was the new trend for amateurs. Unfortunately it’s always the last guys in who get burned by a bubble. Those developers are being suffocated from the holding costs on their sinking investments. After watching home prices double and triple, nationwide home valuations have plunged since 2006 with more yet to come. Homebuilders (XHB) and financials (XLF) have been crushed by the bursting real estate bubble and it will likely take years before these stocks regain prior highs.