For months now, investors have been all atwitter (pun intended) over the potential for a bursting tech bubble to kill the bull market. Major financial websites have “tech bubble” tags for your bubble-browsing convenience. High-profile pros warn of stratospheric valuations and cratering prices. And to top it off, the Nasdaq is down 5.5% since March 5.[i]
But before you run for the hills with visions of 2000 dancing through your head, breathe. Some corners of the sector might have their issues, but a broad bubble this is not. Here are 11 reasons why you needn’t fear.
1. Tech, as a sector, isn’t carried away.
High fliers steal headlines, but the broader category isn’t wildly detached from the broader market. Since the bull began on March 9, 2009, Tech has outperformed the MSCI World by about 13 percentage points (186.4% vs. 173.1%).[ii] That’s a far cry from the actual Tech bubble, when the MSCI Technology Index nearly doubled the MSCI World from the beginning of 1999 through the March 24, 2000 peak.[iii]
2. Broad-based euphoria isn’t here.
In 1999/2000, restaurants showed CNBC instead of ESPN, CNN hosted a debate on whether “boom and bust” was passé, bartenders served up stock tips and a certain demography-based forecaster predicted the Dow would hit 35,000 by 2009. Many folks assumed this forecast was gospel. Today, most think bust is a breath away, many retail investors are still shunning stocks post-2008, and that same demographer sees the Dow at 3,300 by 2022.
3. Bubble fears are everywhere.
Bubbles are events of mass psychology. When you’re actually in one, few—if any—see it. Those who dare claim trouble is brewing are ridiculed by the herd. This isn’t the case today. Both the “it’s a bubble” and “it isn’t a bubble” crowd have fairly sizable followings. That’s a sign of divided sentiment—not a bubble.
4. Everyone’s looking for a repeat of 2000.
Bubbles rarely unfold the same way twice—our pattern-seeking brains just think they should, and we’re wired to look for a near-term repeat of the last one. But that makes it exceedingly unlikely to happen—those fears and expectations are already baked into prices. Markets usually do what few expect.
5. There probably is some euphoria in some Social Media and Biotech firms.
How else could one explain the occasional triple-digit valuations? Expectations for some of these firms are likely too unrealistic for the next 12 to 18 months. But that’s just normal—it’s not unusual for small segments of the market to get carried away. That doesn’t mean a bull dies.
6. The industries in question are tiny.
By the Tech Bubble’s peak in 2000, Tech had swelled to 29% of the S&P 500 by market cap—legitimately big enough to rupture the broader market and economy. That’s orders of magnitude bigger than those supposed time bombs, Biotech and Social Media. Biotech—actually a segment of the Health Care sector—was a measly 2.7% of the S&P 500, by market cap, on its February 25 peak. That’s up from 1.2% on 2/28/2011—and 2.4% when the bull began on 3/9/2009. As for Social Media, there is exactly one company in the S&P 500—Facebook (FB) . Last year’s 32.6% return, it’s safe to say, had naught to do with all those so-called speculative tech IPOs.[iv] There are more in the broader Russell 3000, but they’re still less than 1% of the index. A slide in either industry is bad news for those who are over-concentrated (always diversify!), but it doesn’t have any fundamental reason to take down broader markets.
7. Broad market fundamentals are favorable.
Earnings are growing—driven largely by revenues, not cost-cutting. The global economy is expanding nicely, with the developed world marching forward and China still contributing heavily to global growth despite its much-feared slowdown. There is plenty of fodder for future earnings growth, and few appreciate it.
8. Tech, too, has plenty of reasons to do well.
Advances in mobile and cloud computing are driving demand for new services and products—and for all the components that make up those gadgets, particularly software. Firms big and small around the US delayed spending on IT hardware and software upgrades—as businesses gain confidence, it’s likely they allocate yet more cash toward tech.
9. IPO issuance isn’t off the charts.
Today’s IPO market resembles 1996, not 2000. Firms aren’t doubling and tripling out of the gate—there is no equivalent of Pets.com. The number of offerings is up thanks to the JOBS Act (which eased reporting requirements for smaller public firms) and improved sentiment, but most of these firms boast decent revenues, if not profits. They have largely sound business models, unlike many of the dotcoms of yore. We haven’t reached the point where investment bankers take advantage of an increasingly optimistic market by promoting countless new offerings lacking real fundamentals. That’s when the trouble comes. The consensus view today is decidedly not “likes are the new profits.”
10. Total stock supply is constrained.
Net issuance—gross issuance minus share buybacks and cash-based M&A—has contracted during this entire bull market. The pace of contraction accelerated in Q1, even as IPO activity continued.
11. Hype is at a minimum.
Once upon a time, there was a communication infrastructure firm called Global Crossing. It commanded huge premiums in early 2000 as it constructed its global fiber optics network—supposedly the permanent backbone of the New Economy. It was here to stay! Except it wasn’t—it filed Chapter 11 in January 2002, with its stock price down over 90%. These days, outside the small core of true believers, you’ll be hard pressed to find many people saying today’s social media firms will be here for all time. Plenty of skeptics question whether we’ll be using some of these services—and whether anyone will still want to advertise on them—even a few years from now. Most seem to assume—fairly or not—at least some of these firms are a flash in the pan (the next MySpace), and they accept that creative destruction will continue—the progression from VCRs to DVDs to Netflix (NFLX) streaming isn’t done.
Where Tech—and the overall market—goes from here in the near term, it’s impossible to say with certainty. Short-term moves aren’t predictable—too irrational. Volatility could very well continue, but that’s normal and healthy in bull markets, whether it’s volatility in a narrower category or the broad market. It doesn’t mean the end is nigh.
This constitutes the views, opinions and commentary of the author as of May 2014 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.
By Elisabeth Dellinger, Fisher Investments
[i] FactSet, as of 04/30/2014. Nasdaq Composite Index Total Return, 03/05/2014-04/30/2014.
[ii] FactSet, as of 04/30/2014. MSCI World and MSCI World Technology Total Return (Net), 03/09/2009-04/29/2014
[iii] FactSet, as of 05/01/2014. MSCI World and MSCI World Technology Price Return, 12/31/1998-03/24/2000.
[iv] FactSet, as of 04/30/2014. S&P 500 Total Return Index, 12/31/2012-12/31/2013.
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