A couple of days later Twitter experienced a similar decline in its market value (in percentage points) and its stock price is now down by almost 30% from its peak just a few weeks ago.
Paraphrasing Keynes who stated a long time ago: The market can stay irrational much longer than you can stay liquid.
While the strong form of the efficient market hypothesis is certainly in doubt, its weaker form seems to be right on insofar as it is almost impossible for the individual investors to outperform the market in the medium to long-run (meaning a time horizon of several years). A few years ago Warren Buffet spectacularly engaged in a famous bet that hedge funds would actually fail to outperform the stock market in the years to come, and he won the bet as most hedge funds have underperformed the market by sizeable margin since the financial crisis.
Furthermore, even if investors correctly identify overvalued asset classes or sectors that seem to be frothy, it is almost impossible to get the timing right, meaning that the average investor will certainly not profit from "bubbles" even if predicted ex-ante.
While it is certainly true that stock markets and especially the Tech sector have performed extremely well over the last 10 years since the end of the financial crisis, there are some reasons to doubt the current narrative of a new emerging stock market bubble.
First, real interest rates are still well below the long-run historical average, meaning that from a fundamental value point of view asset prices should be higher. Note that this is also true for P/E ratios. With global real interest rates being way down, it is not entirely clear that we can rely on historical price-earnings ratios as a reliable guide as to whether the stock market valuations are out of line with fundamentals or not.
Second, US GDP growth has slightly accelerated over the last year, some of it being the result of the trillion dollar tax cut the Republicans have recently passed. Moreover, economic growth in 2018 will most likely outperform annual growth rates from the previous years. It is somewhat difficult to imagine a scenario where stock markets tank right after profits surge as a result of the handout due to the much lower tax rate on corporate profits.
Third, while corporate debt levels have surged again in recent years, one should bear in mind that interest rates are still extremely low, thus also implying a lower debt service. Furthermore, while corporate debt levels have increased as a share of GDP, they are still relatively low as a share of corporate profits, which seems to me the more meaningful measure here.
Finally, could a severe stock market decline cause an economic meltdown? Sure it could but the probability of another financial meltdown is relatively low. First, it should be noted that while housing is an asset class largely owned by the middle class, about 80% of the stock market, and maybe more, is owned by the top 10%.
Furthermore, there was much more leverage in the housing bubble than in the stock market. Consequently, even a relatively large wipeout in equity values could have a very limited effect on consumption and investment and thus the broader macroeconomy, especially if the Fed is willing to offset such a negative shock with easier money, just as they should. With short-term interest rates being close to 2% again, Fed officials certainly do have the firepower to offset a substantial negative demand shock, should such an event occur.
Note that these numbers only contain the pure capital gain and exclude dividends, meaning that the true return was even higher (including dividends would increase the return of the Dow Jones by another 3 percentage points annually).
Note also that the recent returns have been exceeding their long-run historical average, which could potentially indicate that stock markets are somewhat overpriced and that future returns might be lower than what we have experienced over the last decade since the end of the financial crisis.
Here a very handy tool to calculate total returns for the Dow Jones for any time period from the late 19th century onwards.