Are We In Danger Of Another Tech Stock Bubble?

By Gary Alexander

Most investors fear a replay of some past portfolio haircut – specifically the financial crisis of 2008 or the tech stock bubble of the late 1990s, which memorably popped in 2000. In just 31 months, the tech-heavy NASDAQ index fell by 78%, from a peak of 5048 on March 10, 2000 to just 1114 on October 9, 2002.

So that makes the tech stock crash of 2000-02 the worst sector-specific massacre of our lifetimes, right?

Nope. According to Professor Jeremy Siegel’s “Stocks for the Long Run” (Fifth Edition, 2014, pages 43-44), the financial sector of the S&P 500 fell 84% from its peak in May 2007 to its trough in March 2009. That’s slightly worse than the 82% loss in the S&P 500 tech sector from its peak in 2000 to its trough in 2002. What’s even more devastating, the decline in financial stocks in 2007-09 wiped out the previous 17 years of gains – since 1990 – while the tech crash of 2000-02 only wiped out five years of previous gains.

Peak to trough, Bank of America lost 94.5 percent of the market value of its equity. Citibank lost 98.3 percent, and AIG lost an astounding 99.5 percent. The equity holders of Lehman Brothers, Washington Mutual and a large number of smaller financial institutions lost everything…. Barclays fell 93 percent, BNP Paribas 79 percent, HSBC 75 percent and UBS 99 percent. The Royal Bank of Scotland, which needed a loan from the Bank of England to survive, fell 99 percent.

- Jeremy Siegel, “Stocks for the Long Run” (5th edition, 2014, page 44)

The Royal Bank of Scotland (RBS) was formed in 1727, the year King George II was crowned. The historical great-grandfather of Citibank (C) was founded 205 years ago on June 16, 1812. Union Bank of Switzerland (later UBS) was founded in Zurich in 1862, and Hongkong Shanghai Bank Corp (HSBC) was founded in Hong Kong in 1865. UBS survived two world wars and HSBC survived several revolutions within China. (Please note: Gary Alexander does not currently hold a position in Bank of America, Citi Bank, Barclays HSBC, UBS or Royal Bank of Scotland. Navellier & Associates does currently own a position in Barclays and HSBC for any client portfolios).

Bank of America (BAC) was founded by Italian immigrant Amadeo Pietro Giannini in San Francisco on October 17, 1904. Less than two years later, an earthquake and fire destroyed most of the city, but Giannini saved all deposited funds and opened a makeshift pavement office out of two barrels and a few planks, lending out money to rebuild the city. In other words, banks can survive multiple disasters but not market panics.

By comparison, many of the “dot.com” stocks of 2000 deserved to be annihilated. They had no earnings or prospects of future earnings at that time. The tech bubble was built on fantasies and greed. However, some of the biggest U.S. financial institutions had been around for several decades, even a century or more in some cases, and they had delivered solid earnings and dividends over most of those decades.

Unlike the dot-bombs of 2000, most of today’s leading tech stocks are older, well-established firms with desirable brand name products and services, with a steady source of income and billions of dollars in cash. The current tech market is not analogous to the 1999 dot.com fantasies with no earnings and a high cash burn rate. Furthermore, tech stocks have NOT been the runaway leaders of the current bull market.

During the bull market that began March 9, 2009 (according to economist Ed Yardeni in “Tech Now & Then,” June 13, 2017), Information Technology is up 379.8%, the third best sector, well behind Consumer Discretionary (471.2%) and just behind the previously-butchered Financials (+380.3%). At the bottom, Telecommunications Services come in at next to last (up 81.5%), ahead of only Energy (56.5%).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the latest bull market surge (since the lows of February 11, 2016), Yardeni computes Financials in the top spot (up 51.1%) followed by Information Technology (+50.3%) with Telecom Services last (+1.5%).

By comparison, Yardeni reports, the S&P technology rose 1,697.2% from October 11, 1990 to March 24, 2000, more than quadrupling the 417% gain in the S&P 500 over the same time span. At the tail-end of the tech stock bubble, “the S&P 500 IT sector’s share of the overall index’s market capitalization rose to a record 32.9% during March 2000. However, its earnings share peaked at only 17.6% during September 2000. This time, during May, the sector’s market-cap share rose to a cyclical high of 22.9%, while its earnings share, at a cyclical high of 22.0%, was much more supportive of the sector’s market-cap share.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In March 2000, the forward earnings in the tech sector (48.3) more than doubled that of the S&P 500 (22.6). “During the current bull market,” Yardeni says, “the Tech sector’s forward P/E hasn’t diverged much at all from that of the overall index. Last month, the former was 18.1, while the latter was 17.3.”

But that only begs the question, is the whole market (not just tech stocks) overvalued?

Is the Overall Market Near a Bubble Condition?

This is the second longest bull market in history, at over 3,000 days, or 99 months, exceeded only by the 1987-2000 El Toro Grande, which lasted either 150 months (counting from October 1987), or 114 months (counting from October 1990). Bull and bear markets used to turn around a lot faster. Yardeni says the average age of the past 22 bull markets in stocks (since 1928) has been only 33 months, under three years.

Real-life bulls die of old age, but financial bulls are not flesh-and-blood animals subject to decay. They usually die when the economy falls into a recession. Sometimes markets crash out of fear (1987), but no recession follows. As this next chart shows, the vertical lines indicating bull and bear markets have been further separated from each other in recent decades. Specifically, there have been only three recessions and bear markets since 1982. Two of those recessions were short and mild, and one (2008-9) was severe.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We’ve come a long way in this bull market, and we’re also up in 2017, despite the failure of the Trump administration to pass (or even conceive) corporate tax reform or a revised health care plan. But we must remember that other new Presidents also stumbled in their first year. Bill and Hillary Clinton’s health care experiment failed in 1993 and their rookie Attorney General Janet Reno stumbled badly in Waco. George W. Bush won an election that was far more disputed than the recent one, and Bush seemed rudderless until 9-11. Reagan was nearly assassinated in March 1981 and he fired air traffic controllers in August. Obama’s 2009 “shovel-ready” infrastructure plans were mostly spending boondoggles, as was his “Cash for Clunkers.” Even John Kennedy flubbed the Bay of Pigs and Vienna summit in 1961. While the press seems to be reveling in this dysfunctional White House, they weren’t so critical of other rookies in office.

As summer begins (today), it’s time to take a deep breath, see this market in perspective, and then… have a great Fourth of July and summer at the beach, knowing that the stock market has room left for growth.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.