Stunning ratings, IPO Craze boxes on the Bubble checklist

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.”

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.”

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.