It looks like a dot-com crash again. Economy is a title for one

The dot-com crash haunts the memory of many experienced Wall Street investors, and this year’s stock market crash is waking up some serious deja vu.

The S&P 500 has fallen 19% since the beginning of the year, and the tech-heavy Nasdaq has worsened, falling above 28%.

But based on historical trends, we can go halfway through the fall of the stock market. Between March 2000 and October 2002, the Nasdaq-100 sank 78% to its once favorite, but largely unprofitable, technology company.

It was a dot-com bust that washed away the favorites of many of the technology sectors that ruled the 90s, and today there is a striking similar trend in a market that did not exist decades ago — cryptocurrency. The crypto market has lost nearly $ 1 trillion annually in one of the worst sell-offs in the history of the mature market.

BoFA Chart: History of Asset Bubbles

This is part of a dramatic reduction in risk assets, including some of the world’s leading investors, including Jeremy Grantham and Scott Maynard, who have argued that we are reviving the dot-com bubble blow-up.

They say the speculative nature of many investments in the market over the past few years shows that not much has changed since 2000.

“There is a very strong similarity between the dot-com crash and the beer market that we feel today,” said George Ball, chairman of Sanders Morris Harris, a Houston-based investment firm that manages 4.9 billion. Fate. “You would think that investors, broadly speaking, professional or retail, learned their lesson in 2000. And yet, strangely the same thing happened.”

And, of course, what happened after the dot-com bubble burst was a brief but painful recession. Is the market heading in that direction now?

Another growth in the profit era

Former Fed Chair Alan Greenspan has famously described the dot-com-era investor and the market as “unreasonably overwhelmed” and the 2010s have clearly hosted similar dynamics.

Both eras were marked by a growth-over-profit mentality on Wall Street and an aggressive spread of retail investment. And in both periods of economic expansion, the best-performing stocks belong to growth-centric firms.

Take the example of priceline. In 1999, the online travel agency became an overnight success, becoming public more than a year after its inception. The company quickly lost প্রথম 142 million in the first few quarters of its business after spending millions on advertising. Star Trek Star William Shatner, but it didn’t matter to investors.

What they wanted was a portion of the rapid growth from a company that was ready to make travel agents a thing of the past. The stock rose to about $ 1000 at one point from the $ 96 IPO price (adjustment for a six-to-one reverse stock split), but when the market turned around, the stock fell 99% in October 2002 to just $ 6.60.

For a parallel today, consider Peloton. The workout bike maker has become a favorite to work from home during the epidemic, which has seen its stock rise more than 600% from March to December 2020, although it has posted steady losses. Of course, the stock eventually cracked, with shares falling more than 90% from their record highs as investors reconsidered whether the workout bike company was really worth about $ 50 billion (its maximum market cap).

It is clear that in both the dot-com era and today, investors are willing to pay for market share gains and potential future earnings, even in business models that have yet to prove themselves profitable, according to the ball.

“In the dot-com era, and in the run-up and fall of the current market this year, there was an enthusiastic, largely foolish belief that a subset of investments would increase value forever,” he explained. “The reasoning, if any, had no basis in the matrix, the reasoning had no real basis, and the boundaries of the scale depended on a very high rate of continued growth beyond any reasonable expectation.”

Ball added that the “poison” that eventually led to a crash was similar to what markets are currently experiencing.

Dr. Brian Routledge, Associate Professor of Finance at Carnegie Mellon University, says Fate That dot-com blowup has become a land of evidence for new business models, and we can feel something similar today.

“What you see in the bear market and what you see in the recession are some of these ideas that have not yet been tested. It’s a resemblance to the dot-com era, many companies lost it, their models weren’t strong, ”he said.

Tech Stock and Crypto: dot-com darlings 2.0

In the run-up to the dot-com bubble, any company that has added “.com” to its name seems to have found success almost immediately, and more recently in the case of “crypto” and “defi”.

Investors are flocking to this new technology. Arguably, both then and now went something like this:

“Something is growing very fast; It will always grow at a very fast rate. The bigger stupid theory then takes over, people use leverage, and then extreme growth cannot be maintained, leverage is exposed and crashes, “Ball said.” This is certainly true today in technology stocks, as it is in crypto, as you know, and This was especially evident by the reduction in prices throughout SPAC. “

Mills between the two eras have worried the ball that, even after the recent fall in tech stocks, there could be more pain for investors.

“People don’t want to admit it, but psychological has the biggest impact on stock prices, much more than the economy, much more than earnings. It’s psychology, and psychology has become negative, “he said, adding that he expects Nasdaq to” probably “drop below 10,000 10,000 this year, or roughly 12% by the end of Friday, but” no one knows where technology is going to be. “

“I would be much more appropriate to buy tech stocks when they start to rise again than to try to figure out how low they are going to go or to grab a falling knife. When stocks of psychology and technology begin to rise, this is probably the right time to invest, “explained Ball.

Yet, not everyone is so pessimistic about the future of technology sharing.

Liz Ann Sanders, chief investment strategist at Charles Schwab & Co., mentioned in a report on Wednesday. Tweet That S&P 500 tech sector forward P / E dot-com is not “anywhere near” the level seen in the chest race.

Even the all-important cyclically adjusted price-to-earnings (PE) ratio, known as the rocker PE ratio, did not reach the dot-com level at the top of the stock by the end of 2021 – although it is still higher than previously seen. Crisis.

“In a nutshell, this is not a dot-com bubble 2.0 in our opinion, it’s a massive over-correction in a high-rate environment that would create a bipartisan technology tape where there is clear and no technology,” Dan Ives of Wadebush wrote in a May 13 note. “There will be a lot of tech and EV players who will leave or merge, but we choose the winners from our advantage points.”

Ives has called the recent downturn in technology a “generational buying opportunity”, and even other market experts have called for caution.

The macroeconomic gap could lead to a deep recession

The period around the dot-com chest and today’s time may be surprisingly similar, but they also recall a possible apocryphal quote blaming Mark Twain: “History does not repeat itself, but it often rhymes.”

Jeremy Grantham, Grantham, Mayo, and Van Otterlu, co-founders of a Boston-based asset management firm and chief investment strategist, highlighted the macroeconomic differences between the dot-com era and today’s market in a CNBC interview this week. The recent fall in tech stocks may be similar to what was seen in 2000, he said, but the results for the economy could be even worse today.

“What I’m afraid of is that there are some differences with 2000 that are more serious. One of them is that 2000 crashes were exclusively in US stocks, bonds were great, yields were great, housing was cheap. [and] The products were treated well, “Grantham said.

Legendary investors added that today, on the other hand, the bond market has recently hit a “low in the 6,000-year history.” In addition, prices of energy, metals and food are rising, and the housing market is showing signs of cooling off, which could pose serious problems for the economy.

“What you never want to do in the bubble is to mess with housing, and we’re selling at a higher quality of family income than at the top of the so-called housing bubble in 2006,” Grantham said. “We’re really messing with all of the resources. Historically, it’s been very dangerous.”

A Fed-induced recession

Experts say the recent fall in tech stocks will not be the main trigger for a recession like the one in 2000. Instead, the Fed’s efforts to combat nearly four decades of high inflation are expected to be a major source of economic woes.

The Federal Reserve has raised interest rates twice this year, once by a quarter-point in March and again by a half-point in May, and it is likely to continue to raise rates throughout the year. This could be bad news for both Wall Street and Main Street.

“Punchball can’t be sipped forever,” Ball said, referring to the famous metaphor introduced by former Fed Chair William McChesney Martin, who served from 1951 to 1970.

“As inflation is not very hot and transient now, the Fed will raise rates to curb inflation. That’s the decent thing to do, and it should end there. “

The idea that the Fed will probably be the culprit if the recession comes is now widely believed on Wall Street. Even former Federal Reserve Vice Chairman Randall Quarles says the central bank will struggle to engineer a “soft landing” for the US economy – where inflation reigns, but economic growth continues.

Think of the ball, it can’t be the worst thing.

“I think, simply, with the high rate of growth and prosperity and the long passage of GDP gains, we deserve a recession. The popping of bubbles will create an awareness of logic and reasoning that brings a cold shower, ”he said.

This story was originally shown on Fortune.com

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