The word “bubble” gets thrown around a lot in this business, but true bubbles are actually quite rare and require more than just a large appreciation in price. The Dot Com Bubble of the late 1990s was certainly one such “real bubble” in stock prices, and it remains fresh in many investors’ minds despite popping almost twenty years ago now. I was reminded of its lasting impact yesterday when having a discussion with someone who called to ask for some investment ideas on an intermediate-to-long-term basis. I casually mentioned that technology has been my favorite sector the last few years and that it remains so going forward until the market provides me with a reason to reevaluate that opinion. The caller, just as casually, replied that he wanted nothing to do with technology because we are currently seeing the “Dot Com Bubble Part II” and that tech stocks are “way too expensive.” Of course, after hearing him say that, the rest of the conversation digressed to more than just providing some stock ideas since we obviously had a fundamental disagreement on the current state of the market. I reminded him that the S&P 500 was eventually cut in half during the fallout of the Dot Com Bubble, so, if we truly are seeing a similar scenario play out, it likely wouldn’t just be technology that suffers if the “bubble” popped. The investment ideas he was seeking from me would, therefore, be very different in such an environment.
We eventually agreed to disagree on technology’s present place in the market, but the discussion occurred at a very opportune time considering I had just come across some very interesting perspectives on the S&P 500’s tech sector and the NASDAQ 100 from a few of our most trusted resources. First, Bespoke Investment Group produced a very enlightening report that they even titled “NASDAQ Bubble 2.0?” and it provided some good historical comparisons to the run-up in the 1990s and what we are seeing right now (see pages 12-13). Notably, they point out that despite being up almost 600% since its 2009 low, the NASDAQ 100 would still have to double from here just to match the performance enjoyed during its 1994-2000 bubble move. Then there was this “Chart of the Week” from talented technician J.C. Parets, who does a great job putting into context the multi-year recovery period that is often required after bubbles pop. As he notes, the technology sector has only recently climbed back above its 2000 peak and, therefore, has about an 18 year base on which to build (see page 14). Finally, to illustrate how the current tech sector is much more supported by earnings than it was back during the Dot Com Bubble, Strategas Securities showed that while technology made up almost 30% of the S&P 500’s market cap at the end of 1999 (and eventually topped out around 35%), it only made up 12.8% of the index’s earnings. Contrast that with today when tech is a little over 25% of the S&P 500 by market cap but also contributes more than 23% to its aggregate earnings per share. As one can see, the overall landscape today is much different!
The outlook for technology stocks is important because their performance will obviously have a significant impact on the S&P 500 and other major averages. The group held up reasonably well during the correction last month, and the Technology Select Sector index has since recovered and broken out to new highs (a good sign all else being equal). Tech and the major U.S. indices did sell off a little bit yesterday on a combination of factors (reports that the White House will soon announce more retaliatory tariffs against China, the removal of Secretary of State Rex Tillerson, the blocking of the Broadcom/Qualcomm acquisition), but we continue to think dips in the sector are for buying until the strategy no longer works or something fundamental changes with the group. The recovery for the S&P 500 continues to be a process, but we have seen signs of improvement under the market’s surface and believe the odds of seeing a retest of last month’s low have diminished.
And with that, here are the Charts of the Week…
