17th Jan '22 by Edmund Shing

12 comments 3757 reads

Market Musings 15/01/22:
Echoes of Y2K: the dot-com bubble

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Is Technology in a bull or bear market?

Summary:

The behaviour of US retail investors, the mini-bubbles and busts in certain segments of the technology sector and “meme” stocks, and the rampant over-valuations evident in many non-profitable thematic stocks have echoes of the year 2000 and its Technology “dot-com” bubble and bust.
There is an eerie parallel between the Nasdaq Composite index in 2000, and the behaviour of the ARK Innovation ETF and non-profitable US tech stocks today
Now, as in 2000, US stock market valuations are extremely rich by historical standards.
Now, as in 2000, the retail investor has become a driving force behind these hyped sectors of the stock market, aided by easy access to trading apps such as Robinhood for millennials who have no memory of Y2K.
But clearly, not everything is the same - history rhymes, but does not repeat. Technology is far more dominant in our everyday lives today than 21 years ago - the smartphone (a pocket computer in essence) is proof of that.
The good news (so far) is that many overhyped areas of the stock market have already deflated substantially, without taking the overall stock market down with it.
The year 2000 was the trigger for economic recession in 2001, followed by the 9/11 shock that led to a further leg down in the US economy. In contrast, this time, we still expect strong economic growth in 2022.
The value style is performing well of late - if the 2000 experience is anything to go by, small-cap value could have a great time for the next few years.

Meme stocks and the dot-com bubble

We all know that stocks have received huge inflows over 2021 from retail investors, particularly in the US. We have heard the mantra TINA - there is no alternative - many times to explain the popularity of stocks today, at a time when cash and bonds are relatively unattractive in terms of their yield.

On top of that, we also know that younger investors have been attracted to stock investing by the ease of investing via Apps such as Robin Hood. So I suppose that it should come as no surprise to see that retail investing, particularly in the States, has become a driving force behind many elements of the stock markets,…

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The Phoenix

17th Jan '22

Great pearls as always Edmund as we all know the big 5-10 tech stocks have pulled US markets higher over the last twelve months despite the carnage going on underneath.

Would you see any value in the tech stocks that have sold off at this point or would you still be favouring the US smaller company sector if you had to pick one of the two for putting your hard earned into over the next year.

Regards Andy

Edmund Shing

19th Jan '22

Hi Andy

Well there are always pearls to have a look at, at the risk of catching a falling knife, of course!

I would tend to start with the subsectors that have actually held up best within Tech, as these are likely to lead once again once the Tech rout subsides. Also the subsectors where I see the most scope for further M&A activity.

Semiconductors, video games, cybersecurity, e-payments for instance. VanEck and L&G do good ETFs in these spaces.

Within tech small-caps, I think there are plenty of indiscriminate sell-offs, where retail investors have wanted to cash out while they can. I am also looking at biotech for instance, which has been very hard hit of late. BIOG is one investment trust I watch...

But I think we may be paid to wait a little longer, to see some stabilisation and the first signs of recovery first...

Alphaflight

Hey, the markets aren't overvalued are they...

=>Buffett Indicator: $50.1T ÷ $23.8T = 211%

..As for the PE valuation:

...The current S&P500 10-year P/E Ratio is 38.0. This is 90% above the modern-era market average of 19.6, putting the current P/E 2.3 standard deviations above the modern-era average. This suggests that the market is Strongly Overvalued.

Sources:

Market Buffet valuation

Market PE Valuation

Bouden54

I hear many of the smaller tech stocks have sold off, but Tesla still on a trillion dollar plus valuation, so clearly a lot more air needs to come out before this is anyway near to being deflated.

tic_tac_toe

20th Jan '22

Edmund, great article. What else are you able to tell us about the SOCL social media ETF

what does it do, what does it include, how does it work. It seems like a really weird type of ETF to structure if it comprises GME AMC etc

aflash

2 comments

In an interesting discussion of the rotation out of Tech into Value, Eric Balchunas of Bloomberg mentionned AVDV as the 'bargain basement' etf of International Small Cap Value (I hold). The U.K. holdings are well known names, albeit most have a reasonable Stockopedia value score. The tickers are; MNG-MKS-HWDN-STJ-SBRY-RMG-DLG.

So what UK investors and Stockopedia algos regard as bargain basement values are unlikely to receive overseas fund flows in the reversion to the mean.

Unfortunately.

GEMD-PHAR-PDL-I hold and most of the others in the Value without Momentum list have held or will hold.

Then Eric also talks about Ark Innovation as distinct from etfs that mirror the market.

There have been very little fund outflows. It is the underlying stocks that have fallen.

Investors take a small position with the 'hot sauce' that Cathy Woods has provided.

The majority of their capital is in 'plain vanilla' stock and bond etfs.

Odd mixture of vanilla with hot sauce.

Even so applies to my diet.

jburge

Brilliant macro view, very insightful. Thank you.

Revs8

Hi Ed

I was just marvelling at how well your classic bubble graph matches the share price of Peleton over the last 2 years. As a cyclist and gym goer I knew Peleton was all hype. Just an exercise bike with an iPad. Looks like they are just entering despair and might be undervalued soon.

Personally. I believe that it’s healthy that many hyped US stocks have devalued without a crash. Maybe markets that offer better value such as the UK might be better performers this year?

anthonyburns1979

21st Jan '22

Fantastic article - thanks for sharing.

Simon Rowan

Again thanks for your wise words Edmund. I remember well the dot com bubble burst. Also Warren Buffet saying he didn't understand any of it, thought it was ridiculous and wanted no part of it. As you say 2000 is very different from 2022. Technology is very much integrated into all are lives now, whereas it all looked a bit gimmicky and incomprehensible for most of us back then.

On a slightly different tack and with technology and innovation being such a large part of the Japanese economy, I wondered if you had any thoughts on their big sell off. Many commentators have been saying all year that they expected the Japanese market to catch up. Looks more like the other markets are catching down at the moment.

Many of UK Japan trusts have underperformed the Nikkei in recent months. They are obviously not immune from the same headwinds as the USA, but Sonny aside (which makes up 12.5% of the index) it is beginning to look seriously oversold to me

Hear here

but isn’t the market massively inflated by a small handful of huge Tech stocks? If you take those out how would the S&P look?

NeilS

22nd Jan '22

Thank you so much Ed! Always enjoy reading your insights.

Market Musings 15/01/22: Echoes of Y2K: the dot-com bubble

Market Musings 15/01/22:
Echoes of Y2K: the dot-com bubble

Summary:

Meme stocks and the dot-com bubble

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About the Author

Edmund Shing

12 comments

=>Buffett Indicator: $50.1T ÷ $23.8T = 211%

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