The the infamous dotcom bubble. occurred more than 20 years ago when new U.S. technology stocks rose before suddenly entering the bear market in 2021.
This type of bubble refers to an economic cycle characterized by a rapid escalation of market value, usually in the price of affected stocks. However, this rise in prices is often volatile and driven by speculation rather than the firm’s fundamentals.
Now Jeremy Grantham of GMOs believes that the modern stock market has fallen into the trap of a similar bubble. But is this true, and is there evidence to support this claim?
The first is a review back to the Dotcom bubble
The dot-com bubble included a number of cutting-edge U.S. technology stocks, the value of which grew exponentially amid an Internet boom at the turn of the century.
As valuations grew amid an excess of venture capital and mostly speculative investment, the value of stock markets began to grow at a significant and disproportionate rate. In fact, the tech Nasdaq rose from just under 1,000 in 1995 to a peak of 5,048.62 on March 10, 2000, just before the next crash in 2001.
When the gap between earnings and estimates became apparent and the bubble burst, stocks suddenly entered the bear market. The Nasdaq overnight fell nearly 77%, causing billions of dollars in losses worldwide.
Subsequently, a large number of dotcom firms stopped, including Webvan and Pets.com (which lost a staggering $ 147 million for the first nine months of 2000).
What is happening now?
On the surface, the current stock market bears some resemblance to the 2000 dotcom bubble, especially if you look at influential U.S. retail stocks and technology giants.
In the case of U.S. technology stocks, those assets are probably just as inflated, and a significant gap separates their total earnings and stock value estimates. Recently it helped the Nasdaq 100 soar by 2.62% in just 24 hours to 12,564reflecting the highs the index experienced before the 2001 crash.
The concern here is that the latest revival of the tech firm seems to be nothing more than another rebound of the dead cat, which may mask the inflated nature of the stock and the fact that the market may already be in the process of deflation.
This is certainly true, according to GMO chief Jeremy Grantham, who said the stock market is trapped in a bubble similar to the year 2000 and ready to burst.
In an interview with CNBC, Grantham also referred to the S&P 500 with blue chips, which presents an equally large selection of influential technology stocks. In particular, Grantham said he “expects the S&P 500 to fall at least 40% from its peak” this year, sending the index to its lowest level since the bearish coronavirus market in March 2020.
S&P has already fallen by about 18% since the beginning of the year Nasdaq has lost a staggering 28% of its value still for the same period. Although the Dow Jones has performed slightly better, it has also lost 14% of its value since early 2022.
These numbers make the reading gloomy, and they suggest that when the stock market is in a bubble, the air may already be bursting out of it with each passing moment.
Are there any differences with the collapse of Dotcom 2000?
According to Grantham, the stock market bubble crash in 2022 will also be worse than the dotcom crash.
But why is that? Grantham explained that the crash in 2000 was solely for U.S. stocks (mostly technology firms), while bonds, housing and commodities continued to work well and were largely unaffected.
This has led to a sustainable return on diversified portfolios, but the same cannot be said of the current economic climate.
After all, commodity prices and oil prices continue to rise amid a poor energy market and the Russian invasion of Ukraine, while rampant inflation around the Western world is battling by rising base interest rates.
Due to rising base rates in the US and the UK from a minimum of 0.1% to 1% over the last six months, the cost of loan and mortgage payments continues to rise for both businesses and households.
In the short term, this exacerbates the global cost of living crisis, while directly affecting the housing market and further affecting the balance between supply and demand for certain goods.
Due to the potential recession that is also looming, these factors may come together to exacerbate the effects of a stock market crash, creating more significant and long-standing challenges for investors in the process.
Obviously, any potential stock market crash will have dire and far-reaching consequences in the current economic climate, especially if the recession materializes in the second half of 2022.
After all, there is the potential for the economic recession to turn into something similar to the 1970s, when growth stagnated markedly and inflation persisted for years.
It can be argued that firms are already experiencing difficulty, and Target and Walmart in the US have recently predicted an increase in input costs and lower profits. As technology firms are also overvalued, this trend may persist at least for the foreseeable future and underlie a significant reduction in stock value.
Whether the stock market bubble will eventually burst is still unknown. However, there is no doubt that businesses and investors need to prepare at least for downturns and valuations.
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