Political  Calculations

We've long known that the U.S. stock market's "Dot Com Bubble" really began in April 1997 and ended in June 2003, but we've never addressed two key questions about the event:

  1. What caused it to begin?
  2. What caused it to end?

Today, we can answer those two questions. Let's begin by revisiting and tweaking our operational definition of just what an economic bubble is:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realized from owning or holding the asset.

By applying that definition and noting the last month that changes in stock prices were coupled with changes in their underlying dividends per share before the Dot Com Bubble began, we identified April 1997 as the true starting point in time for the Dot Com Bubble. Likewise, we identified June 2003 as being the first month following the end of the period in which changes in stock prices and their dividends per share were decoupled from one another.

S&P 500 Average Monthly Index Value vs Dividends per Share, Dec-1991 to Dec-2007

Having now identified those key months, we can look toward the specific events that occurred either during that month or the month preceding these months to identify the specific causes of the Dot Com Bubble's beginning and end.

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

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