Y2K fashion is making a comeback with wide-leg denim, velour tracksuits, and butterfly hair clips. But alongside this nostalgic fashion trend, there seems to be a disturbing parallel in the tech market.
Out of all the major indexes, the Nasdaq Composite, known for its heavy focus on technology companies, has experienced the most significant rally in 2023. It has soared over 25% year to date. This striking rise can be attributed largely to the “Magnificent Seven” big tech firms, including Apple, Amazon.com, Google’s parent company Alphabet, Meta Platforms (formerly known as Facebook’s parent company), Microsoft, Nvidia, and Tesla. These tech giants have captured the lion’s share of the gains.
But it’s not just the surge in tech stocks that has caught investors’ attention; there are other striking similarities to the past. Will Denyer, Gavekal Research’s chief U.S. economist, points out that the Federal Reserve is currently in the middle of a tightening cycle while real yields on short- and long-term fixed-income securities have significantly increased. Moreover, after a tech-led bull run, equities are now deemed overvalued and offer comparatively poor earnings yields.
However, proponents of the current bull market argue that the similarities between now and the past end there. The economy seems to be on the verge of achieving a soft landing, and the Fed is willing to adjust its tightening policies if growth begins to stumble. Additionally, there is substantial evidence to support stocks as advancements in artificial intelligence and machine learning promise significant productivity and profit gains.
Despite these optimistic viewpoints, Denyer remains skeptical due to the lack of historical precedent supporting this optimism. He points out that after the tech bubble burst in 2000, the Fed aggressively eased its monetary policy but failed to prop up the stock market. Furthermore, although the late-1990s bull market eventually delivered enormous profits through new technologies, investors who bought Amazon stock for $5.30 at the end of 1999 suffered significant losses when it dropped to less than $1 a year later.
In conclusion, while Y2K fashion makes a trendy return, investors should approach the current tech rally with caution, considering the potential risks and uncertainties reminiscent of the past.
The Importance of Considering Cycles and Valuations in Investing
As the Federal Reserve and artificial intelligence are expected to play a role in the future of investing, it is crucial for investors to not overlook the significance of both market cycles and valuations. This has led many to divert their attention from U.S. equities and shift their focus towards fixed income investments, which currently offer more attractive yields.
Even though stocks are projected to outperform in the long term, some experts argue that bonds still present an appealing option for investors. UBS chief investment officer of Global Wealth Management, Mark Haefele, expects high-grade and investment-grade bonds to generate total returns of 10%-15% over the next six to 12 months. Consequently, bonds have become the most preferred asset class for many investors.
It is important to note that there are significant differences between the current market landscape and the dot-com bubble of 2000. One of the most crucial distinctions is the profitability of companies like Apple, which stands in contrast to cautionary tales such as Pets.com. This profitability has been reflected in recent earnings reports, further reinforcing expectations of continued growth in the bottom lines of these companies.
Tech giants have experienced a notable boost this year due to cost-cutting measures and increasing enthusiasm surrounding general artificial intelligence (gen AI). DataTrek Research co-founder Jessica Rabe emphasizes that while these factors have contributed to the rally in Big Tech shares, it is ultimately their positive earnings momentum that has propelled these stocks higher. This positive momentum has been maintained despite a turbulent 90 days for the broader U.S. equity market.
On the other hand, some experts believe that tech stocks have already reaped sufficient rewards for their involvement in AI, comparing their situation to that of winners during the dot-com era who preemptively benefitted from future gains. Consequently, opinions differ when it comes to determining how smart investors are currently allocating their funds.
Ultimately, investors who experienced the dot-com bust of 2000 have gained valuable knowledge and are expected to make wiser decisions in the present market environment. However, experts remain divided on the strategies of the so-called “smart money.”