Forgive me if today’s stock market makes me feel a bit like Rip Van Winkle. Maybe, like Rip, I’ve been asleep since early 2000, which marked the peak of one of the biggest bull markets ever.
Consider today’s initial public offering (IPO) market. It’s on fire, with new multibillion-dollar tech stocks going public at a stratospheric valuation virtually every week. Uber Technologies (UBER). Lyft Inc. (LYFT). Pinterest (PINS). At the current rate, the dollar value of IPOs seems set to top the $97 billion 1999 record. What’s even more worrisome: Many of the most popular IPOs (such as Uber and Lyft) went public despite losing money hand over fist.
Then there are the FANG tech stocks: Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOGL). This handful of stocks comprises fully 10% of Standard & Poor’s 500-stock index market capitalization. And the forward price-to-earnings ratio on the FANG stocks, on average, is a staggering 49.6, according to Yardeni research.
This all sounds way too familiar to anyone who lived through the 2000-02 tech meltdown — the worst bear market since the Great Depression of the 1930s. The S&P 500 tumbled 47.4% and the tech-laden Nasdaq 100 lost 82.3%. Of course, that bear market was soon surpassed by the 2007-09 bear, which clawed 55.3% off the value of the S&P and helped trigger the Great Recession.
As inflated as the FANG stock prices may be today, tech stocks got much, much pricier in the late 1990s and early 2000 when many highfliers had no earnings and some had no revenues. What’s more, we’re not seeing anything like the euphoria we witnessed around tech stocks in the late 1990s when many people quit their jobs to become day traders, helping to inflate a historic speculative bubble.
As the saying goes, “History doesn’t repeat itself, but it often rhymes.” What we’re seeing today, in my view, is an echo of the tech bubble of the late 1990s – a rhyme. And it’s not music to my ears.
I’m hearing otherwise apparently savvy market mavens speak the four most dangerous words in investing: “This time is different.”
And here’s another fascinating blast from the past: Many of the fund managers who put up terrific numbers in the late 1990s, only to crash and burn in the 2000-02 meltdown, are back at the helm of mutual funds and other investment vehicles (or never left) – and not doing badly in the current market.
I had thought these fellows would have found another line of work. But I was browsing investment headlines the other day when I stumbled across several familiar names.
The renewed success of these managers is just one of the things that worries me about today’s stock market. The same type of fast-growing, overvalued stocks are leading the market higher now as did before the 2000-02 tech meltdown.
Among the other problems:
Then there’s the market itself. From the news reports, it sounds like it’s going straight up. But it’s been more like a roller coaster, ending up very close to where it started. From Jan. 26, 2018, through July 15 of this year, the price return of Standard & Poor’s 500-stock index has been a piddly 4.9%. Throw in dividends, we’re up 8%. The rally doesn’t feel as red-hot when you consider that, does it?
What’s more, the average stock in the U.S. is actually in the red during that period. It’s the big growth stocks, particularly tech stocks, that have carried the market higher. All of these factors – including the ascendance of tech and other growth stocks and the poor performance of smaller stocks and undervalued stocks – were hallmarks of the late 1990s bull market.
No, you don’t sell everything. You never sell everything. That’s because all the wise guys prognosticating about the future direction of the market, including me, are often wrong – even if rarely in doubt.
Late last year, I advised cutting back on your stock allocation by 5% or 10%. That money belongs in high-quality bonds or bond funds, which are likely to do well if the stock market does crater.
Be especially careful of some of today’s hot stocks, especially in technology. The excitement over tech stocks today is nowhere near as insane as attitudes got in late 1999 and early 2000. But valuations of many tech stocks are way too high, in my view. The S&P technology sector is trading at nearly 20 times analysts’ forward earnings estimates. It’s past time to sell some of these highfliers. By contrast, the S&P 500’s P/E is 17. That’s high, but not nutty.
In 2000-02, as awful as the bear market was, investors who shunned tech stocks and funds and instead put their money into statistically cheap, undervalued stocks, as well as emerging markets and real estate investment trusts (REITs) – all of which had lagged badly in the bull market – did quite well in the bear market. Tilting toward some of those areas might well pay off well in the next bear market.
But bottom line, it’s a worrisome market. Tread carefully.
Don Kaufman delivers what readers are calling 'HIS BEST YET!' In this exclusive Guide, Don will give you ALL the secrets he's taught millions of other traders to help guide them along in their successful options trading journey...
Now, this is NOT for those who only want to make a HALF attempt...nope...this is ONLY for those serious about becoming a better trained, more profitable, and long term options trader!
If that's YOU...Download Your Copy below: