Here at InvestorPlace, we believe we’ve just entered a transformative decade. One in which technology will change…well, everything.
We also believe the investment wealth generated from these changes will be astronomical.
That doesn’t mean the entire stock market couldn’t suffer a painful crash that decimates certain portfolios.
Some of us older investors lived through a similar period of “transformative technology” that didn’t have a happy ending – the 2000 Dot-Com bubble/burst. And as our macro expert, Eric Fry, writes below, there are some strong similarities to then and now.
This is not to say it’s time to sell your stocks and prepare for the worst. However, we’d be foolish not to use the past to help us navigate the future. And that’s what Eric helps us do below.
I’ll let him take it from here.
Have a good weekend,
We don’t tell the stock market what to do; it tells us.
No matter how often, or how painfully, the stock market may remind us that it is cyclical, many of us investors simply forget it… or turn a blind eye to it.
We become overly fearful when we should be courageous, and overly confident when we should be cautious.
One decade after the grisly dot-com bust, a MarketWatch story accurately conveyed the giddy excesses of the era by describing late-1990s tech fund managers as “masters of a parallel universe… [and] Poseidons astride the Internet-stock wave.”
But as the MarketWatch story also pointed out:
“The bust ended a brief but phenomenally lucrative period for investors willing to take a chance on unproven technology companies… and on largely unproven fund managers who claimed to understand them.
“The rallying cry of the Internet crowd, “It’s different this time,” was at once bullish and bullying. Anyone who said otherwise about stock valuation — that sales and earnings still mattered — just didn’t get it.
“Technology-fund managers of the time were media celebrities, highly sought seers of the stock market with their fingers on the Internet’s pulse and promise.”
But as soon as the dot-com bubble burst, these “Poseidons” found themselves drowning in wave after wave of “sell” orders.
By now, you’re probably asking… why the heck are we talking about something that happened 20 years ago?
Simply because history never repeats itself precisely, but it usually rhymes. Today’s giddy stock market environment rhymes with 1999 as closely as “cat” rhymes with “hat.”
Here’s what I mean…
Find the Balance Between Naysayers and Fearmongers
“I don’t think it’s a bubble… For the long term, tech equals growth… I don’t think I’m going to be any less enthusiastic about this next year, or the year after that, or the year after that.”
The source of that quote was a guy named Kevin Landis, and he offered these insights on February 27, 2000 — just days before the dot-com bubble burst spectacularly… and tech stocks of all shapes and sizes plummeted.
During the boom years of the dot-com era, guys like Landis achieved rock-star status… and for obvious reasons. They could do no wrong.
In the five years preceding the dot-com peak, Landis’ Firsthand Technology Value was the No. 1 mutual fund in America. It had soared more than 700% over that time frame, and investors were throwing money at Landis’s high-octane fund.
But that’s when the party ended.
The dot-com bubble burst, stocks cratered, and investors fled the scene as quickly as possible.
Amid the severe two-year selloff that ensued, the tech-heavy Nasdaq Composite Index tumbled 75%, while Firsthand Technology Value — and many other funds like it — plummeted more than 85%.
And right now, stock valuations are hitting all-time highs — even surpassing the lofty levels of the dot-com peak of 2000.
And yet, investors of all sophistication levels are trotting out rationalizations for these high valuations. The higher prices soar, the more eagerly investors rationalize sky-high valuations.
Cathie Wood, the pedal-to-metal tech-stock investor/celebrity who has guided the ARK Innovation ETF (NYSEARCA:ARKK) to spectacular gains during the last few years, recently echoed the exact words Landis uttered in 2000 when she said, regarding today’s conditions, “This is no bubble.”
She expanded upon that statement by saying, “I do believe that the market is beginning to understand how profound some of these platform opportunities are and how sustained and rapid the growth rates are going to be.”
In Wood’s view, unprecedented tech innovation we’re seeing presently justifies higher company valuations. That’s because tech stocks can grow at such incredible rates that they render traditional valuation metrics irrelevant.
This bullish narrative is not the only financial phenomenon that rhymes with its 1999 counterparts. Some price trends are also rhyming… as the chart below shows.
An “Eerily Similar” Trajectory
During the past five years, Wood’s ARKK has traced out a price trajectory that has been eerily similar to the five-year price trajectory of Landis’ Firsthand Technology Value Fund during the late 1990s.
To be clear, this chart does not possess any mystical predictive power.
So even though ARKK has tracked closely with Firsthand’s trajectory 20 years earlier, that striking similarity does not mean ARKK will begin plummeting like Landis’ fund did.
That said, bad things often happen to richly valued stocks… and Wood has not shied away from loading her portfolios with pricey stocks.
Now, significant differences exist between today’s stock market and the 1999 edition.
Many of the technologies in focus today are arguably more potent and transformational than those of two decades ago.
But human psychology never changes — especially not the psychology that causes the stock market to cycle through periods of low valuation to high valuation and back again.
Because stock market values today are higher than they have ever been, and because tech-stock valuations are among the highest of the high, we investors owe it to ourselves to do a gut check.