Photographer: Michael Nagle / Bloomberg
Photographer: Michael Nagle / Bloomberg
The IPO market is manic. Stocks have not been so expensive since the dot-com era. The Nasdaq 100 has doubled in two years, leaving its valuation inflated – all while volatility remains stubbornly high.
It is a configuration that has allowed investors to make fat profits from 2020, a year that defied easy explanations. It is also one that has a growing cohort of experts warning about one ball.
Knowing when market rallies go from logical to excessive is always difficult. It was almost impossible as 2020 ended, with interest rates set at near zero and the federal government launching another $ 900 billion into the economy. But history provides clues and a series of currents store conditions meet criteria that could probably be found on a balloon checklist.
Take a study by Harvard University researchers published in 2019. It noted that, although not every stock increase is a disaster, those who share certain attributes, including increased share issuance, increased volatility and a sector or index that doubles and is twice as large as the wider 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 councilors LLC, said Bloomberg’s “What Goes Up.” podcast, adding that “many of them are obviously speculative technology companies.”
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The Nasdaq 100 has doubled in the last two years
Source: Bloomberg
Stock issues, initial public offerings and unverified companies have become so popular that post-registration registration fell in 2020. U.S. companies sold $ 368 billion in new shares last year, 54 percent more than the previous high, according to data compiled by Bloomberg.
IPOs raised $ 180 billion, the most ever, as companies like Snowflake Inc., Airbnb Inc. and DoorDash Inc. they took advantage of the return to the stock markets. The first-day pops of stock prices among newcomers were the highest in two decades, according to Bill Smith, CEO and co-founder of Renaissance Capital LLC.
“These are telling signs,” said Robin Greenwood, a professor at Harvard Business School and co-author of the 2019 study. “The probability of a market correction is much higher today than the historical average.”
A subclass of IPOs took off in 2020 as well, raising concerns. Special purpose vehicles, which use proceeds from a sale of shares to acquire a private company, have raised about $ 80 billion in 2020, more than the total in the previous decade. The SPACs that made a purchase increased by about 100% per year, according to research conducted by George Pearkes, global macro strategist at Bespoke Investment Group.
“These are pretty hot things,” he wrote in a recent note, although he added that what is “more remarkable” is that SPACs that have not yet announced transactions have gained about 20%. “Obviously, this is quite speculative behavior.”
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The Nasdaq 100 is trading at a valuation multiple last seen in 2004
Source: Bloomberg
While some assets are worrying, the wider market may not be coming soon. First, the Federal Reserve has promised to keep interest rates set close to zero by conducting extensive stock assessments. looks more reasonable compared to bond yields.
And researchers at Harvard say that the Nasdaq 100, while in a historic race, whose price has doubled in just two years, is not yet exorbitantly high compared to the S&P 500 index, compared to previous bubbles. The larger gauge has accumulated 50% since 2018 and does not follow the technological gauge that is difficult to meet their criteria.
The bubble talk has been falling for several months, causing a lot of warnings from Greenlight Capital David Einhorn at Wolfe Research strategy.
As the S&P 500 closed 2020 with a solid, but still modest, gain of 16%, the spots on the edges of the rainbow market have recently experienced problems. From the peak in December, the vaccinated heroes Moderna Inc. and BioNTech both fell 35%, with no obvious catalyst for the sale. FuboTV Inc., up 596% since December 22, has lost almost half of its value as the stock block has expired. Shares of Lemonade Inc. they fluctuated violently as similar restrictions were lifted.
“People have returned to a narrative-over-evaluation discipline. You can type something “disruptor” and increase it 10 times for no real reason, “said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth councilors. “So yes, there are market pockets that don’t make much sense to me.”
Bubble warnings are likely to increase in 2021, when companies will have to provide profits that justify valuations that, through historical measures, have increased. The S&P 500 ended the year trading nearly 30 times its profits, which means 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 have raised eyebrows. Bitcoin record advance. Increased transactions by retail investors who have inflated previously little-known companies. Tesla Inc. 750% swelling. However, the Cboe volatility index never closed below 20 after rising to 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 win fast. This could be dangerous, “said Marshall Front, chief investment officer at Front Barnett Associates. “You never know how long the party will last, but it doesn’t end well.
– With the assistance of Drew Singer, Sarah Ponczek and Claire Ballentine