Op-Ed: Equity bubble looms over grads

Sunday, November 19, 2017 - 11:32am

The campus here in Ann Arbor typically has a great pulse on the looming issues across the United States. We all know the University of Michigan’s campus is quite often at the forefront of discussions about social equality, race relations and political controversies. But one impending crisis has gone virtually unnoticed by the people I speak to, and it has the potential to affect every graduate on campus. I’m not talking about our football team. I’m talking about a looming bubble lurking in U.S. equity markets. 

The Dow Jones Industrial Average, a stock market index and the quintessential benchmark for the U.S. economy, closed out the month of October just shy of its all-time high of 23,440 points. For perspective, the index has more than doubled in value since the conclusion of the Great Recession seven years ago. Nobel Prize winner Bob Shiller compared share prices to earnings and found that markets are more expensive than at any other time in the past century, except for the period just before the bursting of the dot-com bubble. Interest rates have remained at virtually zero across the world and domestically for years. The world’s four largest publicly traded companies by market cap are all tech companies. Add in a potential conflict with North Korea, trade war with China, bankruptcy in Venezuela and eroding trust in our political system, and the time seems right for a crisis.

Despite some of the warnings, the prediction of a bubble isn’t unanimous. Plenty of smart people out there believe the market isn’t in a bubble, but actually at the beginning of an even longer bull run. Warren Buffett is one of them.

But consider for a moment that the last time markets looked like this was in the late 1990s. Back then, the stock market was in the midst of the longest bull run in history. The Dow Jones had more than tripled its value over the last seven years of the decade. Price-earnings ratios were also near-record highs. Confidence was so high that then-Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance.” And the world’s four largest publicly traded companies by market cap, described at the time as “Four Horsemen,” were all technology companies. And in the midst of the globalization revolution, pitfalls littered the road ahead — Russian ruble flu, LTCM, derivatives and terrorism. History might not repeat, but it certainly rhymes.

Even if there is a bubble, how could it affect a college undergraduate like myself? I am in Ann Arbor, immersed in and yet ironically sheltered from the outside world, safe and sound in my comfortable dorm and Canada Goose jacket. How could an equity bubble possibly affect me?

While the classic image of recent college graduates working as baristas at Starbucks isn’t representative of most students’ early careers, there are a number of negative consequences of graduating into a recession. The most notable difference is the wage gap between those graduating into a recession and those that didn’t, with losses chalked up to about nine percent of initial annual earnings by the National Bureau for Economic Research. The study also noted many majors that provide less technical training — social sciences, liberal arts and even business degrees — are often less useful in securing a job out of school. This forces many students to either change jobs more often early in their careers or return to school.

FANG companies — Facebook, Amazon, Netflix and Google — have been among the most aggressive hiring companies of new college graduates thanks to their fantastic growth over the past half-decade. But tremors in the market could threaten to derail future hiring for companies like Amazon, which plans to add more than 100,000 new jobs in the United States over the next year. College students here, and across the country, have good reason to be nervous entering the labor market this coming year.

Alex Fial is a Kinesiology sophomore.

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