The NASDAQ has fallen ten per cent, shares in Apple have lost almost a quarter of a trillion dollars, but this is not another dot-com crash in the making.
This is not another dot-com crash!
Sometimes markets get over ebullient. To cite Alan Greenspan, former chair at the US Federal Reserve, sometimes they display “irrational exuberance.” And then there is a correction, and in due course the correction itself corrects, and markets return to the level they were at before correction. On other occasions, markets go mad. We see a form of madness of crowds: a bubble is created, and then, eventually, it bursts. And such an occurrence can leave an economic scar that takes an age to heal.
Take the Mississippi bubble of the early 17th century. The bubble mostly centred on French investors who were persuaded by Scottish adventurer John Law to pour money into land around the Mississippi area where it was speculated that there were vast hordes of gold and silver. It all ended in tears. It has been argued that the event left such an impact on the French psyche that it turned the nation off the concept of a banking system focused on debt. And that, says economic historian Nial Ferguson, is one of the reasons why the industrial revolution occurred in the UK and not France.
There have been many bubbles in history; two of the most recent are the dot-com bubble of the late 1990s and the subprime bubble, which led to the 2008 banking crisis.
The dot-com bubble followed the dot-com boom when investors threw money at technology companies. It used to be said, at that point, that if you took a dollar note and wrote dot-com on the back, it would double in value. During the 1990s, the technology-dominated NASDAQ increased ten-fold. Between early 2000 and 2002 the index lost almost 75 per cent of its value. It took 14 years for the index to pass the dot-com peak.
Interestingly, the dot-com crash didn’t hurt the economy that much. The most likely explanation for the low economic impact of the crash is that the dot-com boom and crash revolved around equity — there was little debt.
In reaction to that crash, investors turned their attention on property. Subprime grew from that and involved a massive level of leverage. When this went sour, the economic consequences were dire. The economic contraction was severe, the recovery slow. Although the 2020 contraction has been even more severe, the recovery may be quicker than the post-2008 recovery.
NASDAQ booms again
Between 2010 and a few days ago, the NASDAQ increased roughly five-fold. Not quite like the surge seen in the 1990s, but pretty dramatic all the same. Incidentally, from the low point of the dot-com crash to a few weeks ago, the index was up just short of ten-fold.
But stock market crashes and corrections have an interesting characteristic, they often over-sell. Savvy investors can often pick up bargains in the aftermath of a crash.
The difference this time
The dot-com crash occurred after a plethora of companies that had never made a profit, with only the flimsiest of business models, enjoyed enormous valuations. There was a sense that the internet was a big deal, but no one was quite sure why. After the crash, there was even a reaction against the internet itself, with some people suggesting it was overhyped technology.
The latest tech boom was different. It roughly coincided with growth in earnings. The darling of techs this century has been Apple, but the company has seen results improve rapidly too. In 2004 total net sales at Apple were $8.2 billion. In 2016 they equalled $260.17 billion.
Techs have boomed this decade, but so have revenues and profits.
Apple’s P/E ratio is 35. Sure, that is quite high, but I am not sure it is out of the way for a company that has seen such rapid growth.
Similarities with the past
There are some similarities with the late 1990s. The dot-com boom was about internet stocks. Some technologies such as AI, gene editing tech, autonomous cars, augmented and virtual reality, and quantum computers have similar potential as the internet did in 1999. But no one is quite sure how any of these technologies will pan out.
The likes of Lyft and Uber aren’t close to making a profit. Some pundits doubt they ever will. These two companies, along with Tesla, could win big time if we see autonomous cars and car-sharing converge. But how will that pan out?
This air of mystery surrounding new technologies does create the potential for bubbles.
But it has been the giant techs that have powered the recent rises in the NASDAQ. Given that Covid has led to an acceleration in the shift towards digital, to an extent, the rise in these stocks has been rational.
Did shares in techs rise too high? I think they did to an extent and a correction was justified. And shares may well fall a lot further.
But in ten years, I expect most of these techs to be a lot bigger than they are today. For these companies at least, this is not another dot-com crash.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees