The Transition from Growth to Mania: Navigating a Bull Market's Final Surge

Bubbles tend to form during periods of low growth but high liquidity. Liquidity is the market’s dopamine, fueling the rise.Bubbles also need a scapegoat—an asset class in crisis....

Everyone’s talking about bubbles these days. Markets have soared, tech valuations are reaching new highs, and it seems like every other day brings warnings of an impending crash. But bubbles aren’t just about prices—they’re about psychology. And if history teaches us anything, it’s that there’s a difference between the Growth phase of a bull market and the Mania phase that follows.

Right now, we’re not in full-blown mania, but we’re close. We’re at the transition—the point where the market begins to feel different, but there are still opportunities. The key to thriving in this phase isn’t just about staying rational—it’s about having a clear exit plan.

My favorite chart shows the NASDAQ price divided by the money supply. It strips away the noise of central bank money printing, giving you a clearer picture of what’s really happening beneath the surface.

The Three Phases of a Bull Market: Lessons from the Dot-Com Era and Today

Bull markets always follow a rhythm, cycling through three phases: Discovery, Growth, and Mania. These phases might look different each time, but their core dynamics stay the same. Understanding them is crucial to navigating the ups and downs of any market cycle.

Let’s break down these phases, drawing lessons from the dot-com era and seeing how today’s market stacks up.

Discovery Phase (1990–1994)

The Discovery Phase is when new ideas emerge, but few recognize their full potential. In the early 1990s, following Japan’s asset bubble collapse, the internet was just starting to take shape. Companies like Netscape were planting the seeds for what was to come, but most investors remained cautious. The NASDAQ hovered around 400—far from the explosive growth we’d see later.

Analogy to Today: The Discovery Phase in today’s market took place between 2014 and 2020. Cloud computing, AI, and blockchain were emerging technologies, but their transformative potential hadn’t fully captured the market’s attention. The NASDAQ was rising, but not at the feverish pace we’d see later.

Lesson from Discovery: The Discovery Phase is quiet. It’s where long-term visionaries start making their bets, positioning themselves for the future while others wait on the sidelines. This is when the seeds of future growth are planted.

Growth Phase (1994–1998)

During the Growth Phase, the market starts to notice. From 1994 to 1998, the NASDAQ rose steadily from 400 to 1,400. It wasn’t euphoria yet, but a period of sustained, healthy growth. However, investors faced four significant corrections—each greater than 15%. While these corrections were unsettling, they presented golden opportunities for those with a clear plan.

1. January 1994 to April 1994: A 15% drop due to interest rate hike fears from the Federal Reserve.
2. July 1996 to December 1996: A 17% correction driven by concerns over tech valuations.
3. March 1997 to April 1997: A 15% dip amid broader market volatility.
4. October 1997: The Asian Financial Crisis triggered a 15% drop, but the market rebounded.

Analogy to Today: Today’s Growth Phase began in 2020 and has continued through 2024. Tech stocks have led the charge, driven by innovations in cloud computing, AI, and e-commerce. Like the dot-com era, we’ve seen corrections, such as in 2022 when inflation fears hit, but these moments have been buying opportunities for those prepared.

Lesson from Growth: During the Growth Phase, momentum builds, and corrections are brief. It’s easy to feel confident, but this is when you should start preparing for what’s next. The Mania Phase brings faster gains—but also sharper risks. Having a clear plan becomes essential.

Mania Phase (1998–2000)

The Mania Phase is when the market goes wild. From 1998 to 2000, the NASDAQ shot from 1,400 to over 5,000. The gains were incredible, but they were built on shaky foundations. Valuations reached absurd levels, and companies with no earnings were trading at astronomical prices.

Here’s what the Mania Phase looked like in the dot-com bubble:

1. August 1998 to October 1998: A 19% drop during the Russian Financial Crisis and LTCM collapse, followed by a sharp recovery.
2. July 1999 to August 1999: A 15% correction as profit-taking hit the market, only to see gains resume.
3. September 1999 to October 1999: A 16% drop before another surge higher.
4. March 2000 to May 2000: The bubble began to burst, with a 30% decline as panic set in.
5. August 2000 to October 2000: A 23% drop as the market continued to unravel.
6. November 2000 to February 2001: The dot-com bust was in full swing, with the NASDAQ losing 28%.

Analogy to Today: We are about to enter the Mania Phase, likely from August 2024 to September 2025. Like the late 1990s, rapid, euphoric gains may occur, but risks will multiply. Valuations will become unsustainable, and corrections will hit harder.

Lesson from Mania: This is where most investors lose. Gains come quickly, but so do sharp corrections. The key to survival isn’t just staying rational—it’s having a clear exit plan. Know when to take profits and step aside before the inevitable crash.

How to Play the Game: The Rules of Transition

1. Don’t Fight the Market: Transitioning to Mania doesn’t mean it’s time to exit completely. In fact, the Mania Phase often brings the biggest gains. But it’s also where volatility spikes. Have a strategy to take profits, and don’t get sucked into chasing skyrocketing stocks without an exit plan.
2. Ride the Waves, But Be Ready to Exit: The Mania Phase is volatile. Corrections will come, but so will rebounds. Don’t panic in the face of sharp drops, but don’t get greedy either. Have a clear exit strategy and stick to it. Knowing your risk tolerance is critical.
3. Look for Strength: During the Mania Phase, not every company will survive the crash. Focus on those with strong earnings, real growth potential, and solid fundamentals. In the dot-com bubble, speculative firms were wiped out, but companies like Amazon thrived.
4. Exit on Your Terms: Staying rational amid euphoria is important, but more important is knowing when to get out. Have a clear plan for when you’ll take profits, and stick to it. The hardest part of the Mania Phase is resisting the temptation to believe the market will keep going up forever.

Why We’re Not in a Bubble Yet

Are we in a bubble? Not yet. Bubbles happen when markets become detached from reality. While today’s market is starting to show signs of froth, it’s not completely disconnected from fundamentals. Bubbles tend to form during periods of low growth but high liquidity. Liquidity is the market’s dopamine, fueling the rise.

Bubbles also need a scapegoat—an asset class in crisis. In 1998-2000, capital fleeing from emerging markets helped fuel the dot-com bubble. Today, we’re transitioning from steady growth to mania, and while there’s more risk, there’s also more opportunity—if you know how to navigate it.

The past four years have been about steady growth. The next year or two will be about rapid gains and heightened risk. But the key to success is simple: don’t just stay rational, have a plan. Those with a clear exit strategy can still find success in the Mania Phase. Just be ready for a wild ride.

Thanks for reading,?

Guillermo Valencia A

Cofounder of Macrowise

September 6th, 2024