Photographer: Michael Nagle / Bloomberg
Photographer: Michael Nagle / Bloomberg
The IPO market is manic. Shares have not been that expensive since the dotcom era. The Nasdaq 100 has doubled in two years, leaving its valuation inflated – while volatility remains stubbornly high.
It is a scheme that keeps investors from 2020, a year that defies an easy explanation, on a thick return. It’s also one with a growing cohort of experts warning against one bubble.
Knowing when market meetings change from logical to outrageous is always difficult. It was nearly impossible when 2020 ended, with interest rates nearing zero and the federal government unleashing another $ 900 billion into the economy. But history offers clues and a stream of currents market conditions meet criteria likely to be found on a bubble checklist.
Consider a study by Harvard University researchers published in 2019. It noted that while not every stock increase comes with disaster, those who do share a number of characteristics, including greater stock issuance, increased volatility and a sector or index that doubles and is twice the broader market. Check, check and almost check.
“Are there parts of the market that are in a bubble? Yes, clearly, ”Peter Cecchini, founder of AlphaOmega Advisors LLC, said on Bloomberg’s “What Goes Up” podcast, adding that “a lot of them are clearly speculative technology companies.”
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Nasdaq 100 has doubled in the past two years
Source: Bloomberg
Stock, IPO and blank check issues have become so popular that record after record fell in 2020. US companies sold $ 368 billion in new stock last year, 54% more than the previous record, according to data collected by Bloomberg.
IPOs raised $ 180 billion, the most ever, as companies such as Snowflake Inc., Airbnb Inc. and DoorDash Inc. benefited from the stock market recovery. According to Bill Smith, CEO and Co-Founder of Renaissance Capital LLC, the first day of stock price attempts among newcomers were the largest in two decades.
“Those are telltale signs,” said Robin Greenwood, Harvard Business School professor and co-author of the 2019 study. “The odds of a market correction today are much higher than the historical average.”
A subclass of IPOs also took off in 2020, causing additional concerns. Special purpose vehicles, which use the proceeds of a stock sale to acquire a private company, raised about $ 80 billion in 2020, more than carved in total in the previous decade. SPACs that made a purchase are up about 100% this year, according to research by George Pearkes, global macro strategist at Bespoke Investment Group.
“That’s pretty bubbly stuff,” he wrote in a recent note, adding that it’s “more remarkable” that SPACs that aren’t yet to announce deals have won about 20%. “This is clearly quite speculative behavior.”
Higher and higher
The Nasdaq 100 Index is trading on a valuation multiplex last seen in 2004
Source: Bloomberg
While certain assets are showing troubling signs, the broader market may not be on the rise. First, the Federal Reserve has pledged to keep interest rates around zero, pushing up stock valuations looks more reasonable compared to bond returns.
And the Harvard researchers say that while on a historic run whose price has doubled in just two years, the Nasdaq 100 is still not exorbitantly high against the S&P 500 Index, compared to previous bubbles. The wider gauge is up 50% since 2018 and is not lagging behind the tech-heavy gauge enough to meet their criteria.
Bubble talk has been simmering for months, prompting numerous warnings from the likes of Greenlight Capital David Einhorn at Wolfe Research strategists.
As the S&P 500 closed 2020 with a solid but still modest 16% gain, problems have recently emerged in the erratic fringes of the market. Since their peak in December, vaccine heroes Moderna Inc. and BioNTech are both down 35% with no apparent catalyst for sales. FuboTV Inc., up 596% on Dec. 22, lost nearly half of its value when the stock freeze expired. The shares of insurance company Lemonade Inc. lurched violently when similar restrictions were lifted.
“People have returned to a narrative overvaluation discipline. You can put the ‘disruptor’ name on something and make it go up 10 times for no real reason, ”said Jon Burckett-St. Laurent, Senior Portfolio Manager at Exencial Wealth Advisors. “So yes, there are parts of the market that I don’t feel like doing.”
Bubble alerts are likely to get louder in 2021, when companies will have to deliver profits justifying valuations stretched by historical measures. The S&P 500 ended the year at nearly 30 times earnings, meaning it will start a new year higher than ever since 2000. The Nasdaq 100 is at 40 times earnings, a level not seen in two decades.
Other price trends have raised eyebrows. Bitcoin’s record-breaking progress. Increased trade through retail investors who have blown up previously little-known companies. From Tesla Inc. 750% bulge. Despite everything, the Cboe Volatility Index never closed below 20, after peaking to 80 in March. At 23, it remains above the long-term average of 19.5.
“As speculative juices flow, people become more entrenched in opportunities to make money quickly. That can be dangerous, ”said Marshall Front, the chief investment officer at Front Barnett Associates. “You never know how long the party will last, but it doesn’t end well.
– Assisted by Drew Singer, Sarah Ponczek and Claire Ballentine