The Chinese stock market rallied more than 150% as the Shanghai Composite Index rose from 2,037 at the end of June 2014 to its peak of 5,166 in June 2015. Many market commentators, most notably Bill Gross, called it a “stock market bubble” and predicted a collapse. However, it bears asking, “What is a stock market bubble and how is it different from just a run-of-the-mill bull market?”
Simply stated, a bubble is an irrational bull market, where prices for stocks have run up much more than can be justified by improvements in the underlying corporate fundamentals. Classic stock market bubbles were the Japanese bubble during the late 1980s and the U.S. tech bubble that occurred in the 1990s. A characteristic attribute of a bubble is an unjustifiably high price-to-earnings multiple (P/E) for the market.