Bubbles in financial markets are typically thought to be an uncommon phenomenon, but over the last 60 years, they have occurred with greater regularity. A “bubble” is an expression of mass hysteria that has been well-studied, not just in scientific literature but in the financial press as well.¹ More recently, such a bubble seems to have been forming for the last 12 months. This one in particular has been frothing up over the possibilities of Artificial Intelligence (AI), a topic that appears to touch all areas of society.² How will it impact job losses or job creation? Will AI-driven computers be able to take over the world, fulfilling the ominous plotline of “Terminator”?³ Will AI influence the 2024 presidential election? And for our purposes, what about the market’s seemingly single-minded focus on a few mega-tech stocks, most notably NVIDIA Corp.?

Bubbles, by nature, cannot be predicted. The chart below shows a number of different bubbles that arose and burst since the late 1970s. Expanding the date range slightly, I would have added the “Nifty-50” large-cap growth stock bubble of 1970-1971 and the first “Oil Embargo Shock” bubble in 1974. Each of these bubbles share some common characteristics:

1) A new product, technology, or investment shows sudden and significant success. Oil prices were going up and would continue to climb because the world was running out of oil. Single-family homes never went down in price. No one trusts paper money, and Bitcoin will be the preferred alternative to an archaic metal as the 21’st century alternative to paper currency. The “Nifty-50” growth stocks of the early 1970s were called “ruler” stocks because you could put a ruler on a sheet of graph paper (quaint, huh?) and extrapolate their future earnings out in a straight line indefinitely.

2) Prices of the assets involved (shares, homes, oil, gold, bitcoin) begin to rise on a sustained basis. Success begets success, more and more people are drawn in, and the price rally gains momentum. Equally as important, the rationale for continuing to buy gets more and more convincing. Compelling reasons to explain why “it’s different this time!” appear in the financial press and even the popular press. There is a reason many believe those four words in quotes may be the most expensive words in the English language.

3) As excitement grows, the “fear of missing out” overwhelms any objections raised by rational and reasonable valuation metrics, and prices continue to rise at an accelerating pace. Bubbles also share one other common element: when they burst, and they always do, the turn almost always comes abruptly, without warning, and the aftermath is not pretty.

For the prudent financial advisor, raising any cautionary flags in such periods can make you seem foolish or out of touch. Clients may even get angry that everyone they know is making a fortune by doing nothing more than buying a few shares of Nvidia (2024), Polaroid (1971), Cisco (1999), condos (2008 in the U.S. or 2020 in China), or the Nikkei (1989). They wonder if you have lost your mojo or if the new times have just passed you by. If one is conscientious in their work and has helped clients build well-diversified portfolios through time-tested strategies, clients may acquire the immunity needed not to succumb to this “virus.” However, as we have all learned in recent years, being vaccinated does not guarantee someone will not catch a virus.

Although it’s hard work not to succumb, the aftermath of a bubble can typically present opportunities to the investors who have bided their time – and their capital. Valuations become compelling. It is times like these where being a contrarian comes in handy.

I began writing these essays when Segall Bryant & Hamill was formed in 1994. I have spent countless hours trying to reflect on themes that would stimulate thought and provide insight to our clients. This quarter’s essay is no different, with one exception. It is the last one. I have made the decision to end “Thoughts on the Current Environment” with this edition.

Please note that this is not a notice of my retirement. Rather, I expect and intend to spend more time both on managing client relationships and shepherding their portfolios through any periods of stormy markets and the “morning after” that always follows.

I sign off with a personal reflection. In the last month, I met a friend at the famed Berghoff Café in Chicago for lunch. This restaurant is an institution in the city. We had a good meal, and when it was over, the day being nice, I decided to walk back to our office on the very west end of downtown. This took me straight through the financial district of Chicago, where I have spent my entire career. I found myself cutting through the Field Building, an Art Deco skyscraper in the heart of LaSalle Street. It occurred to me that this is where my career began with an internship in the summer of my junior year of college at an old-line Chicago investment counseling firm. I was exposed to a world of thinking about markets and securities, applying that thinking to client portfolios, and working with those clients to help them achieve their goals. It was an eye-opener. I was fascinated and immediately hooked. I knew what I wanted to do professionally. That excitement about investing and working with clients remains as strong in me today as it did when I started. And I plan to continue this pursuit for as long as I am able.

As I walked through the lobby of the Field Building, I realized that I could have met myself walking through that same lobby 57 years earlier. I started to think about what I would say to the younger me when I wondered if the date 57 years ago was a workday or a weekend. When I exited the building, I reached for my phone, and instead of typing out the question, I asked Siri what the day of the week was for that date in 1967. In the time it took to raise the phone from my mouth to eye level, “Monday” was already on the screen. How, I thought, could I have ever explained that one to my younger self?

I feel incredibly fortunate to have a career that spanned so many changes, both societal and financial. It has provided me an outlet to think critically about securities markets and economic cycles (including bubbles), which really means thinking about the human experience as much as anything. I have been and continue to be surrounded with colleagues that share my passion for investing. I have had the opportunity to meet and talk with smart people that challenged my views and made me a better investor. I have had the opportunity to explore all sorts of investments and bring what I learned to bear on the portfolios of clients – institutional and individual. I take great pride in having helped them achieve their goals. I can’t think of anything more challenging, exciting, gratifying, and frustrating. I love it. And, to repeat, I intend to keep doing it. They don’t call it “the practice of investment management” for nothing. Even after more than 50 years of practice, I still have to keep working at it if I hope one day to get it right!

One brief postscript: I would be remiss not to acknowledge the great help of Tom Dzien and Michael Chilla, both of the SBH Quantitative Research Team, in preparing these essays over the last several years. Thank you for your work, good suggestions, and cheerful tolerance of some of my stranger requests!

The research assistance of Tom Dzien and Michael Chilla of CI SBH Asset Management in the preparation of this essay is appreciated.