DEFINITION of Echo Bubble
Echo bubble is a a post-bubble rally that becomes another, smaller bubble. The echo bubble occurs in the sector or market in which the preceding bubble was most prominent, but the echo bubble is less inflated and thus, if it also bursts or deflates, will leave less damage behind.
BREAKING DOWN Echo Bubble
One of the first echo bubbles was the rally that occurred after the Great Crash of 1929. Just like its more memorable predecessor, the smaller echo bubble eventually burst. There is currently debate, but two possible echo bubbles in the making today are in technology stocks and housing. An expansive technology bubble rapidly formed at the turn of the 21st century - one of the biggest bubbles of all time, with every grandmother and her dog chasing flaky internet and technology stocks into thin air, but the sector took a time out after the bubble popped, chastening greedy "investors" and causing much regret and fights between husbands and wives. In the ruins of the sector, though, rose Lazarus stocks with legitimate business models. Also, the irrepressible American entrepreneurial spirit gave life to new breeds of technology companies, which, some say, are being granted bubble valuations along with the post-big bubble survivors. Therefore, one could argue that there is presently an echo bubble in the sector.
The housing bubble of the mid-2000 decade burst in dramatic fashion, inflicting much more economic injury to the country than the tech bubble. The person who bought an internet stock at $200 per share that eventually went to zero only lost the money in his brokerage account. By contrast, after the collapse of the housing market, a family lost its home. In 2018, some 10 years after the pricking of the housing bubble, there are market observers who believe that an echo bubble has formed in housing. However, they will point out that this is not a national phenomenon, as only certain markets are experiencing housing price gains that do not seem sustainable.