12/27/20
S&P 500: 3703
Nasdaq: 12805
10 Year Treasury: 0.9%
David R. Snyder, CFA
1968….1983….2000….2020. Those are the years that technology and/or internet bubbles peaked and it wasn’t pretty thereafter. They happen just about once in a generation or every 15 to 20 years. I remember when the last tech bubble burst in 2000 and the Nasdaq declined almost 70% over a three year period. Pundits predicted that the Nasdaq would not reach its 2000 highs for many decades (it only took 13 years). But I knew better having studied bubbles and human behavior. I wrote back in 2000 that a new tech bubble would form 15 to 20 years later and voila, here we are 20 years later with a new bubble. And you can bet on another tech bubble sometime in the period of 2035 to 2040.
It takes a whole new generation of investors to forget the lessons of the past and make the same mistakes of earlier generations. Joining in are some older investors who did experience the trauma of bubbles bursting earlier in their investing lives but somehow time has eased their pain. I have discussed in depth this phenomenon with financial bubbles in past writings and the same psychology applies to all bubbles. By the way a new financial bubble is scheduled to occur somewhere between 2026 and 2030.
All of the signs of a tech bubble are staring at our faces. Technology, internet and EV stocks without earnings and sometimes sales are literally surging 10 to 20% per day over the last two months. Hot Initial Public Offerings (IPO’s) are getting priced over 100% higher than their projected valuations just a week earlier. October and December are each in the top eight months of the last 20 years of number of IPO’s coming to market. And as of last week December IPO’s had an average first day return of 95% which ranks it as the 7th biggest ever for monthly gains. Don’t forget the year 2000 is included in these relative monthly rankings when we had the highest IPO returns ever earlier that year, making the last three months IPO data that much more impressive in terms of greed. For sure, the current bubble is not as speculative as 2000 but it is still an extraordinary time period.
The IPOs these past few months have been concentrated in the technology, internet and EV sectors. SPACS have played a big role in the current euphoria with over 25 new filings just last week. The Renaissance IPO ETF (IPO 68) advanced 59% from October 2013 when it went public to its pre-Covid highs in February of this year, but has since doubled from the earlier highs. So IPO appreciates 59% over a six and a half year period and then surges 100% in nine months from its pre–Covid highs. Sound a little out of whack? Well the last time the IPO market performed this feat was in 1999-2000. Needless to say past periods of IPO lunacy were followed by very poor returns.
Another sign of a sector bubble is the stock markets willingness to believe immediately whatever an analyst forecasts if it is positive. For example when Morgan Stanley recently raised its price target on Tesla (TSLA 661) by over 100 points, the stock spiked to that price within three days. Last Wednesday at 1 PM a noted money manager issued a buy on XL Technology (XL 30), another EV SPAC, with a sky high price target, causing the stock to surge 43% in the next hour of trading. Now analysts usually have some minor near term influence on stock movement, but nothing close to their current impact. Investors are willing to believe anybody with some influence in bubble times if it is a positive note. I will never forget in 2000 when an analyst raised his price target on Qualcomm (QCOM 143), a crowd favorite, to $1000 when the stock was below $500. Within days the stock surged hundreds of points without any real new information except the analyst call.
In my 34 years in the industry there has only been one other time that I had to leave the office and take walks to clear my head after observing the surreal spikes in speculative stocks. That was in early 2000. Both now and in early 2000 my head was literally spinning watching these bubbles grow. But the most egregious example was the 49% increase in QuantumScape’s (QS 115) stock price on Tuesday following Apple (AAPL 132) news that it may launch an EV next year with technology that AAPL has internally developed including their own battery. This should have been a big negative for QS but somehow the speculators interpreted it to mean that AAPL was going to use QS battery technology. And remember QS stock had already increased over 500% in the prior six weeks!
Another sign of a bubble is when the financial news networks highlight on their stock tickers the price of a bubble asset. In 2008 as oil and other commodities were peaking, CNBC had the price of these assets prominently displayed on their screen at all times. Recently the network has placed the price of bitcoin under the stock market indices on their screen. It worked in reverse in late 2008 and early 2009 when they placed the stock prices of the depressed financials on the top of their screen. That marked the bottom for the financials.
Speaking of bitcoin (no I am not going to capitalize bitcoin), just saw a commercial last week from Grayscale, a digital currency service provider. They were promoting bitcoin over gold, advertising that gold has no utility. Really???!!! Gold is actually the most useful metal. Besides its primary usage in jewelry and coinage, gold is also essential for producing many products in electronics, dentistry, aerospace and medicine. There is about fifty cents of gold in every cell phone produced. Yet Grayscale had to make false comments about its competitor gold to hype bitocin? I guess anything goes when you are in a bubble.
For those of you who just think I am an old-timer and don’t recognize the future, just want to warn you about my 34 year track record. I have never called a bubble that did not burst soon thereafter starting with the 1987 stock market crash. I called the top of the internet and tech bubble at the exact top in March of 2000. My only problem was that I was sucked back in well before the bubble completely deflated. And in 2007 at the exact top in the Fall I forecast a devastating recession and stock market collapse. I also wrote extensively in 2007 and 2008 about the bubble peaking in oil and commodities and forecast the coming “peak demand” while the rest of Wall Street was calling for secular “peak supply.” Other bubbles I identified included the 3D printing stocks and the cannabus stocks a few years ago.
Another sign of a tech bubble is the concentration of the biggest tech stocks. In 2000, the top five stocks made up 17% of the S&P 500, while today it is around 20%. Investors view the largest names in the space as the safest way to play the sector, and pile in to those cult stocks.
Does the bursting of this tech and speculative bubble mean the overall stock market will also decline. The answer is yes and no. In 2000 when the tech bubble burst, the S&P 500 declined 50% over a three year period but we did have 9/11 and the Iraqi war that exacerbated the decline. Value stocks actually did reasonably well during that time period. In 1983 we were just coming out of a recession similar to today and the overall stock market corrected 15% before advancing sharply over the next three years. I do not expect a big overall stock market decline over the next few months, only a sharp correction in January.
But we have entered the last hurrah for growth and speculative stocks. Despite small cap value outperforming small cap growth by 2400 basis points since September 2nd, small cap growth has slightly outperformed small cap value since December 9th. There has been a rebound in stocks that benefit from Covid as new virus cases surge and the vaccine distribution logistics get worked out. But the reversal will be short lived and most likely over by mid-January.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.