The Wall Street Journal: If It Looks Like a Bubble and Swims Like a Bubble...
Article by James Mackintosh in The Wall Street Journal
I have been resisting the comparison between the dot-com bubble and today’s stock market, but the similarities have grown too strong to ignore. Here are five areas where the parallels are strong, along with one caution about applying the bubble label to the broader market.
Exponential growth in the price of story stocks
Anything connected to electric vehicles or clean energy has gone ballistic in the past few months. Electric-car maker Tesla is the most obvious example, becoming the fifth-largest U.S. company by value after rising eightfold last year. This year so far, it has added $134 billion to its market capitalization, far more than the $78 billion it was worth at the start of 2020.
A flood of early-stage IPOs tapping into the popular themes
Initial public offerings and the cash shells of special-purpose acquisition companies, or SPACs, now used as an alternative have been booming, attracting celebrity backers and allowing companies without any revenue, let alone profit, to join the market. The Renaissance IPO index, which tracks new listings, more than doubled last year, by far the best performance since it started in 2009.
New investors who don’t know what they are doing
Don’t get me wrong, there are plenty of smart and well-informed small investors. But stocks are again being swung about by the sort of amateur mistakes made by a beginner hoping to win big. One I wrote about recently, is to buy a stock purely because its share price is low, which should be all but irrelevant but which drove performance in the first couple of weeks of this year.
Even more excruciating is to buy the wrong stock, as happened with last year’s rush into Zoom Technologies, owner of the ticker ZOOM and not a lot else, rather than the better-known Zoom Video Communications (ticker ZM). This month Elon Musk’s call to use Signal, an alternative to Facebook’s WhatsApp messaging software, led to the unrelated biotech stock Signal Advance, leaping from 60 cents a share to $38.70. It has plunged since but is still at $6.25, bafflingly.
These sort of mistakes made headlines in the dot-com bubble, too, as droves of newcomers rushed to trade stocks based on message-board rumors.
In 1998 and 1999 simply adding “.com” to a company’s name led to gains averaging 74% in the next 10 days, according to research from Purdue University academics in 2001.
“There does seem to be some irrational exuberance, especially with companies that have no products today,” he said.
Even if you agree that today’s glamour stocks are overly frothy, there is still a question about whether that extends to the broader market.
Of course, investors might be wrong either about future cash flows or about the outlook for bond yields. Either could lead to the stocks going down, perhaps by a lot. But falling because fundamentals changed isn’t the same as falling because a bubble burst, which typically leads prices to plummet ....
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