After a long weekend, the US markets roared back into action overnight.
Well, I say roared, but the only ones roaring at the moment are the bears…
Picking up where it left off on Friday, the NASDAQ plunged 4%. Bringing the total loss for the past three trading days to double digits. A result that puts the index in correction territory.
Of particular note though, is the big hit to tech stocks.
Apple was down 6.7% overnight. Microsoft wasn’t far behind, with a 5.4% dip. And Amazon as well as Facebook also floundered with 4.4% and 4.1% losses respectively.
However, it wasn’t just the top tech stocks that were suffering either.
Tesla, after a stupefying rise to prominence, dropped 21% overnight. Its biggest one-day hit on record.
Suffice to say, you’d be forgiven for thinking we’re headed for a repeat of the dotcom bubble.
Indeed, US stocks as a whole only recently eclipsed valuations to rival this early ‘00s mania. Suggesting that the bubble is well and truly in force.
As for whether it has just burst…well, we’ll have to wait and see.
But one thing is for certain, tech stocks and their investors are being seriously tested.
Which begs the question, is it time to get out of the market?
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Down or up, either is a possibility
First and foremost, I just want to say that this sell-off shouldn’t surprise any seasoned investor.
No matter how passionate you may be about tech stocks (like I am), it was nigh impossible to justify the valuations of some of these companies. As my colleague Greg Canavan has been saying for the past few weeks; the concentration in the big-name tech stocks has been staggering.
Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) accounted for nearly a quarter of the S&P 500’s total weighting recently.
That’s five stocks out of 500, making up close to 25% of the value of the whole index.
Needless to say, that is a very unhealthy balance.
So, in that respect, it isn’t surprising to see this sell-off. The NASDAQ needed — and arguably still needs — rebalancing.
But, does that mean we’ll see the same kind of carnage from two decades prior?
Are we on the cusp of a ‘tech wreck’ 2.0?
Maybe…
Honestly, I wouldn’t be surprised if we did see a huge tech stock crunch. At least, for the US market anyway.
Granted, I wouldn’t be surprised if the NASDAQ had more room to move higher either. This correction may just be a slight bump in the road before the bubble gets inflated even further.
My point is the US market — and the NASDAQ in particular — could go either way.
Here’s the thing though, I don’t think it matters. At least, it won’t matter for investors looking at the long term.
Let me explain why with an example of another bubble from the pages of history.
Railroads, greed, and the greater good
In the 1840s the UK and Ireland experienced a ‘tech’ bubble of their own.
However, the kind of tech they were dealing with didn’t involve microchips or processors. Rather, it was a tech bubble that revolved around the ‘steam locomotive’. Or as we now commonly refer to them: steam trains.
See, in the mid-1840s, after years of a slow economy, the UK was starting to prosper once more. Manufacturing was on the rise, goods were in demand, and the industrial revolution was paving the foundations for a middle class.
The steam train was rapidly replacing the need for horses and carriages. All of which began when the first modern intercity railway emerged in 1830. The first of what would be many to come.
It didn’t take long for investors to recognise the potential of this technology. The idea of a national network of railroads captivated the imagination of almost everyone. And so, bankers, aristocrats, and even everyday people began to pour their money into railroad companies.
As Brian McCullough reports:
‘By 1847, investment in the railways represented 6.7 percent of all national income.’
Unsurprisingly, the bubble eventually popped.
Railway companies started collapsing left and right. With liquidity in some operators reaching almost zero. Meaning investors couldn’t even sell out if they wanted to — no one was buying.
Instead, the only real buying was coming from bigger railway operators. Companies such as Great Western Railway and Midland Railway — operators of networks that are still around to this day.
Long story short, it was a bloodbath. With plenty of inexperienced investors losing plenty of money.
Like any bubble, it is a cautionary tale about the risks of investing.
However, that doesn’t mean no good came out of it. Because as tragic as the financial losses were, this railway bubble actually financed an incredible network of infrastructure.
The money may have gone, but the railways themselves certainly had not.
Thanks to these railways, the British Empire would become far stronger. Paving the way for a far stronger economy. One that truly relied upon this railway network.
Invest wisely, not wildly
Which brings us to our situation today.
Because in many ways, the original dotcom bubble was very similar to this railway mania.
Yes, a lot of people lost a lot of money. But, all that money helped fund and build the infrastructure for the internet as we know it. Allowing the very tech companies that dominate the NASDAQ to reach the highs that they have.
I would argue, we’re seeing a repeat of this kind of exorbitant infrastructural capitalisation.
There are a lot of everyday people that are arguably investing way over their heads. People that are fuelled by greed and self-assured by recent market returns.
In my mind, it is only a matter of when — not if — these people will be burned. Which is why you need to do your best to not get caught up with them.
Thankfully, our local market isn’t quite as insane as the NASDAQ just yet. But there are certainly certain sectors that are showing signs.
The notorious ‘buy now, pay later’ (BNPL) boom is one such an example. Overseeing the incredible rise of stocks like Afterpay.
There is no doubt in my mind that this BNPL sector is in a bubble. One that, just like the NASDAQ, could reach higher highs before bursting.
But, in the long run, it is still paving the way for the future.
Not every company may survive. Nor will they necessarily be successful for some time.
One day though, I suspect we’ll look back at this moment like we do the dotcom bubble.
A period that may have been filled with obscene valuations, but also a time that birthed companies like Amazon, Google, and Microsoft.
Companies that today, for better or worse, are titans of the stock market.
So, I wouldn’t bet the house on the stock market right now (or ever, actually). But, the long-term gains that could come out of this hyper-capitalisation could be truly remarkable.
The tricky part is figuring out who will be the next Amazon and who will be the next Pets.com…
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.
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