2008 crash . With that stage set , the pandemic hit . Many spending alternatives were removed by lockdowns at precisely the same time fiscal and monetary easing went on steroids .
The personal savings rate jumped from a historical average of 7.5 % to nearly 34 % in April 2020 as a result . Suddenly , US households were flush with cash .
The psychology of “ free money from the government ,” combined with leisure spending taken off the table , and the ease of reentering the market using apps like Robinhood , all proved too much to resist for Americans . The amount of stock owned directly by individuals jumped from $ 7.8 trillion after the housing bubble burst to over $ 22 trillion in 2020 . It nearly tripled .
This trend has only accelerated . From Q1 to Q2 of 2020 , as the pandemic hit the United States at full strength , purchases of stock by retail investors increased by a factor of nine . Currently , retail purchasers are buying stock at a rate six times larger than before the pandemic , and Robinhood has nearly doubled its monthly users from 11.7 million to 21.3 million this year . In June , retail investors bought $ 28 billion of stocks and ETFs , the most since 2014 .
Retail investors who exited the market after being badly burned in the dot-com and housing bubbles are back like never before . Regrettably , in times like these , Wall Street does have a history of introducing new and poorly understood products that ultimately become profit vehicles for the sellers and traps for the individual investor .
In the 1920s , Wall Street innovation took the form of investment trusts , the highly leveraged predecessor of today ’ s mutual funds that were run by the banks and offered to unsophisticated investors . Today , the rise of SPACs ( special purpose acquisition companies ) bears an unsettling resemblance to the leveraged investment trusts of the 1920s . These “ blank check ” companies are sponsored and permitted to sell new stock through an IPO with no earnings history and no assets other than money given to them through the IPO . The rise of SPAC mania is a sign no doubt that retail investors are foregoing the time-tested rules of principled investing for simple gambling .
Public participation is by far the strongest leg of this stool . However , it cannot be ignored that public participation was at historical highs in 1929 , 1987 , 2000 and
Time magazine featuring a cover story on J . P . Morgan and the American economy , September 24 , 1923 .
2008 when those bubbles burst . Retail investors betting the farm on SPACs would be wise to remember : LILO .
When bubbles burst , they burst quickly , and with ugly consequences . When prices crashed in the Roaring Twenties , they did not return to their 1929 peak until the 1950s — more than 20 years later , through a Great Depression and another world war . These events scarred a whole generation of Americans , including the investing public .
Galbraith has given us a framework to contemplate the answer to a question that has saved people throughout history from the calamities of burst bubbles : When have I made enough ? When is it time to get out ?
To the frustration of economic forecasters — and the delight of those like Galbraith who make fun of them — there is no way of knowing for sure . The correct answer will also certainly differ from investor to investor , who each possess their own risk tolerance , investment time frame and personal goals .
As we end where we started , looking to history to help us plan for tomorrow , perhaps investors should heed the pithy warning of another legendary prophet of profit , Sir John Templeton , who cautioned , the four most dangerous words in investing are “ this time it ’ s different .”
Collection of the Museum of American Finance
William R . Gruver is a senior fellow at the Open Discourse Coalition , a think tank that promotes a variety of intellectual viewpoints in higher education . He is a Bucknell professor emeritus , as well as a former Goldman Sachs general partner and naval officer . Through his role as a board trustee and director , William helps oversee the investment activities of Lee Health Foundation and Private Client Bank AG .
1 . A financial bubble is a period in which the market price of an asset exceeds the intrinsic value of the asset . In other words , the asset is overvalued . Eventually market prices reach unsustainable levels , and the bubble bursts .
2 . The P / E ratio is commonly used to determine if a company ’ s stock price is overvalued . The ratio is calculated by dividing share price by earnings per share . For example , if a stock share sells for $ 10 , and it has earnings per share of $ 1 , its P / E ratio would be 10x . A high ratio could mean the stock price is overvalued , and vice versa .
3 . The earnings yield is calculated by dividing a company ’ s earnings per share by the stock price . It determines the return on investment for buying stock today . The difference between a stock ’ s earnings yield and the yield on Treasury Inflation-Protected Securities ( TIPS ) paints a picture of the comparative attractiveness between the stock and fixed income markets .
2021 Joseph R . Biden , Jr . Executive Orders , found at : https :// www . federalregister . gov / presidential-documents / executive-orders / joe-biden / 2021
Barry , John M . “ How the Horrific 1918 Flu Spread Across America .” Smithsonian Magazine . November 1917 .
Dailey , Natasha . “ A Majority of Millennial and Gen-Z Investors Are Taking Personal Loans or Borrowing from Friends and Family to Invest in Stocks .” Business Insider . June 24 , 2021 .
“ Fed ’ s Jerome Powell : Jobless Rate Better Than Expected ; Recovery to Take A Long Time .” NPR . September 4 , 2020 .
McCabe , Caitlin . “ Retail Investors Power the Trading Wave with Record Cash Inflows .” The Wall Street Journal . July 5 , 2021 .
Wang , Echo and David French . “ Robinhood , gateway to ‘ meme ’ stocks , raises $ 2.1 billion in IPO .” Reuters . July 28 , 2021 .
14 FINANCIAL HISTORY | Fall 2021 | www . MoAF . org