A sharp but temporary rise in stock prices that follows the collapse of a recent stock market bubble.
Given where tech stocks are at the momentwheezing at a red light after a 17-month rompwhere will they go from here? Will the Nasdaq hitch up its socks and dash to 2500 or maybe 3000? Or is the "echo bubble" starting to leak? And will this pull Nasdaq down to 1500?
Rich Karlgaard, "Tech Stocks at a Crossroads," Forbes, March 1, 2004
After a spectacular rise in the S&P 500, signs of a major market top are rapidly falling into place. While many have heralded the rally as the emergence of a new bull market, history indicates that such large reactions are part and parcel of secular bear markets.
Nobel Laureate Vernon Smith coined the term "echo bubble" to describe such typical post-bubble activity. When a market bubble bursts, it is generally followed by a secondary bubble, an "echo bubble" during which market psychology matches the extremes of sentiment displayed in the first bubble.
Typically, markets do not find a genuine bear market bottom until after the echo bubble pops.
Mark M. Rostenko, "Look out below!," CBS MarketWatch, March 18, 2004
A continuation into 2003, Milunovich says, will require an acceleration in tech earnings. He's not optimistic that will happen. "The stocks are priced for an echo bubble," he says. "Our tech index is trading for about 28 times next year's earnings, which is above the 10-25 range of pre-bubble times. Unless earnings are much better than estimates, there's a good chance to retest the low by midyear.
Eric J. Savitz, "Deep Breath: Tech investors who jumped back in the water may soon be coming up for air," Barron's, December 2, 2002
We've been using the word bubble to refer to a fragile or insubstantial financial scheme or situation since 1721 when Jonathan Swift, commenting on the South Sea Company's disastrous scheme to assume England's national debt, penned the following lines in his poem, The Bubble:
The Nation too late will find,
Computing all their Cost and Trouble,
Directors' Promises but Wind,
South Sea at best a mighty Bubble.
The new phrase echo bubble is being whispered throughout the financial community these days as people wonder whether the stock market gains of the past 18 months signal a fresh bull market or presage another spectacular collapse that will be the mirror of the late 90's tech-driven bubble. You might also see an echo bubble described as a B wave (1987) or, my favorite, a bubble junior (2003).