Photographer: Michael Nagle / Bloomberg
Photographer: Michael Nagle / Bloomberg
The IPO market is manic. Shares have not been so expensive since the dot-com era. The Nasdaq 100 doubled in two years, leaving its valuation bloated – while volatility remains stubbornly high.
It is a setting that left investors sitting on big returns in 2020, a year that defied an easy explanation. It is also one that has a growing group of experts warning about a bubble.
Knowing when market highs go from logical to excessive is always difficult. It was almost impossible when 2020 ended, with interest rates set close to zero and the federal government releasing another $ 900 billion into the economy. But history offers clues and a great deal of market conditions meet the criteria that would likely be found in a bubble checklist.
Do a study by Harvard University researchers published in 2019. noticed that, while not every increase in inventory results in disaster, those who share some attributes, including greater share issuance, greater volatility and a sector or index that doubles and is twice as large as the broader market. Check, check and almost check.
“Are there areas of the market that are in a bubble? Yes, of course, ”Peter Cecchini, founder of AlphaOmega Advisers LLC, said at Bloomberg’s “What Goes Up” podcast, adding that “many of these are obviously speculative technology companies”.
Banner Time
Nasdaq 100 has doubled in the past two years
Source: Bloomberg
Stock issues, initial public offerings and blank check companies have become so popular that record after record fell in 2020. American companies sold $ 368 billion in new shares last year, 54% more than the previous high, from according to data compiled by Bloomberg.
IPOs it raised $ 180 billion, the highest ever, as companies like Snowflake Inc., Airbnb Inc. and DoorDash Inc. took advantage of the rebound in the stock markets. The stock price spikes among newcomers have been the biggest in two decades, according to Bill Smith, CEO and co-founder of Renaissance Capital LLC.
“These are telltale signs,” said Robin Greenwood, a professor at Harvard Business School and co-author of the 2019 study. “The likelihood of a market correction is much higher today than it is in the historical average.”
A subclass of IPOs also took off in 2020, raising concerns. Purchasing vehicles for special purposes, which use the proceeds of a stock sale to acquire a private company, raised about $ 80 billion in 2020, more than the total accumulated in the previous decade. SPACs that made a purchase increased by about 100% in the year, according to research by George Pearkes, global macro strategist at Bespoke Investment Group.
“This is very bubbly,” he wrote in a recent note, although he added that what is “most notable” is that SPACs that have not yet announced deals have gained about 20%. “Obviously, this is very speculative behavior.”
Louder and louder
The Nasdaq 100 index is being traded on a multiple valuation last observed in 2004
Source: Bloomberg
Although some assets show worrying signs, the broader market may not be punished immediately. On the one hand, the Federal Reserve has promised to keep fixed interest rates close to zero, making stretched stock valuations seem more reasonable when compared to bond yields.
And Harvard researchers say the Nasdaq 100, although in a historic run that saw its price double in just two years, is still not exorbitantly high compared to the S&P 500 index, compared to previous bubbles. The broader indicator has gone up 50% since 2018 and is not behind the high-tech indicator enough to meet its criteria.
Bubble talk broke out for months, generating many warnings from companies like Greenlight Capital’s David Einhorn for Wolfe Research strategists.
As the S&P 500 ended 2020 with a solid but still modest 16% gain, points on the market’s most eccentric fringes have recently seen problems. Since the peak in December, vaccine heroes Moderna Inc. and BioNTech plummeted 35% with no obvious catalyst for sale. FuboTV Inc., up 596% on December 22, lost almost half of its value with the end of the stock blocks. The actions of the insurance company Lemonade Inc. rocked violently with the lifting of similar restrictions.
“People returned to a discipline of overvaluing the narrative. You can put the name ‘disruptor’ on something and make it go up 10 times for no real reason, ”said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth Advisers. “So, yes, there are market pockets that don’t make a lot of sense to me.”
Bubble warnings may be higher in 2021, when companies will have to generate profits that justify assessments that, according to historical measures, have grown stretched. The S&P 500 ended the year trading at almost 30 times earnings, meaning it will start a new year higher than at any time since 2000. The Nasdaq 100 is 40 times earnings, a level not seen in two decades.
Other price trends raised eyebrows. Bitcoins record breakthrough. Trading intensified by retail investors who inflated previously little-known companies. Tesla Inc.’s 750% bulge. As a result, the Cboe Volatility Index never closed below 20 after reaching 80 in March. At 23, he remains above his long-term average of 19.5.
“As speculative juices flow, people become more entrenched with opportunities to make money fast. This can be dangerous, ”said Marshall Front, chief investment officer at Front Barnett Associates. “You never know how long the party lasts, but it doesn’t end well.
– With the help of Drew Singer, Sarah Ponczek and Claire Ballentine