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Use of the word ‘bubble’ reaches worrying levels

Traders work on the floor of the New York Stock Exchange.
Spencer Platt | Getty Images
Traders work on the floor of the New York Stock Exchange.

The word "bubble" in association with markets has been mentioned in the press 4,600 times this year, a high profile industry commentator has noted, and it could be a worrying trend if the talk of bubbles continues at this pace, analysts told CNBC.

On Sunday, the co-founder of Morgan Stanley subsidiary ConvertBond.com Lawrence McDonald, who is a well-known market commentator and New York Times contributor, tweeted the statistic and estimates that "bubble" mentions could reach 7,900 by the end of this year.

By comparison, the word was mentioned in news 6,850 times in 2007, the year before onset of the global financial crisis, and 6,800 times in 1999, before the dotcom crash of 2000, he noted.


According to Evan Lucas, market strategist at IG, the bubble talk could become a self-fulfilling prophecy, because the commentators talking about "bubbles" and "overvaluations" often have positions in markets.

"More and more newswires are concentrating on terms like 'bubble,' 'overvalued,' 'overstretched,' 'premium pricing' etc.," Lucas said. "It almost creates a snowball effect, as bearish commentators take bearish positions and then tell their clients to do the same. Eventually the bulls become exhausted and the bears take over."

Strategists say this bearishness could soon play out in markets with the current bull-run in major stock markets nearing "tipping point," and as investors question the economic fundamentals behind the rally.

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"The S&P 500 is struggling to find a reason to go higher and European indices have been trading lower for the past 4-5 weeks after the German Dax hit a record high. Meanwhile, the Australian stock market cannot get past its recent 6.5 year high," said Lucas.

Currently the S&P 500 is trading at 18.84 times earnings, the Nikkei is trading at 18.86, the Australian stock exchange at 16.11 and the German Dax at 16.11. In contrast, China's stock market, which is considered cheap by many industry watchers, is trading at 9.7 times earnings.

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"I personally feel the 'bubble' word is too strong, but stock markets are certainly feeling overdone and have run up too hard," he added.

Lucas' views echo recent comments by uber-bear John Hussman, an analyst and mutual fund owner, well known for his criticism of the Federal Reserve.

Hussman, quoted in the Wall Street Journal at the weekend, said markets were in the throes of a highly advanced equity bubble, now within 15 percent of the 2000 dotcom bubble.

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"The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000," he added.

Andrew Su, CEO of Compass Global Markets and also a trained psychologist, also gave credence to the concept of self-fulfilling prophecies especially in an overheated market environment.

"Certainly the use of the word bubble in the media can impact on peoples' behavior and if something confirms their belief that there is a bubble, they will fixate on that and ignore any other evidence. Once they act on that, then you have the butterfly effect," Su said added.

Su also told CNBC that he believed the influx in bubble talk this year was warranted in some parts of the market, namely Chinese and Australian property and U.S. equities.