Market Selloff A Repeat Of Tech Stock Bubble Bursting?

| April 16, 2014

brokerThe market’s spring swoon is sparking fears that we’re witnessing a repeat of what happened when the Tech Stock bubble burst in 2000. 

Back then the tech-heavy Nasdaq Composite shed a whopping 78% of its value over a 31-month period.  Investors lost over 5 trillion dollars in the process.  And the index has yet to regain its all-time high 14 years later.

It was a terrifying experience for all who went through it.  

The scary thing now is that comparisons with the 2000 downturn are easy to understand.  After all, there are several similarities between them.

The Nasdaq’s gains off the March 2009 lows have outpaced those of the S&P 500 and Dow Jones Industrials.  The Nasdaq has suffered a much bigger drop than the other two major indices at this point.  And the selling has focused largely on technology stocks, growth stocks, and momentum stocks that are perceived to have extreme valuations.

But according to David Kostin, Chief Equity Strategist at Goldman Sachs, there are six ways the two situations are different:

First off, the Nasdaq’s recent returns are not as robust.  While noting that trailing 12-month returns are comparable (22% today versus 18% in 2000), Kostin points out that trailing 3-year and 5-year returns are significantly lower (51% versus 107% and 161% versus 227%).

Second, valuations are hardly extreme.  The S&P 500’s forward P/E ratio today is just 16x compared to 25x during the market’s apex in 2000.  And ratios like price-to-book and enterprise value-to-sales are quite a bit lower than they were 14 years ago.

Third, the market is more balanced today.  Back in 2000, technology stocks generated 14% of the S&P 500’s total earnings but represented 33% of the index’s market cap.  This time around the two metrics are equal at 19%.

Fourth, earnings growth projections are much less optimistic.  During the height of the tech bubble, analysts were forecasting earnings growth of 17%.  Today, the consensus earnings growth estimate is just 9%.

Fifth, interest rates are quite a bit lower.  Three-month Treasury yields are just 0.05% today compared to 5.9% in 2000.  And today’s ten-year yield of 2.7% is a far cry from the 6.0% level we had at the turn of the millennium.

Sixth, there’s no IPO frenzy happening today.  In the first quarter of 2000, there were 115 IPOs completed for $18 billion in proceeds.  Compare that to the first quarter of 2014 in which just 63 IPOs were completed for proceeds of $11 billion.

The bottom line…

Kostin makes a pretty convincing case that the market’s recent woes are not the beginning of another tech-stock bubble-bursting market plunge.  And while he’s skeptical that momentum stocks will lead the market’s recovery, he does believe the broad market will move modestly higher by year’s end.              

Profitably Yours,

Robert Morris

Tags: , , , , , ,

Category: Breaking News, Technology Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market's next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics.