Show me the catalyst.
Plenty of analysts are making the case that the past year’s U.S. stock market gains, led by technology and internet stocks, could set the stage for a repeat of the turn-of-the-century bust of the dot-com bubble — but there’s one very important missing ingredient, a prominent Wall Street researcher noted Tuesday.
Unlike in 2000, the Federal Reserve appears nowhere near ready to begin raising interest rates, said Nicholas Colas, co-founder of DataTrek Research, in a Tuesday note.
In 2000, the tech sector “began to roll over as soon as it became clear that the Fed was intent on taking short term interest rates to new cycle-high levels and cool the booming U.S. economy,” he said, pointing to the chart below. “The next Fed meetings saw rates goes up another 50 basis points. It was only at the end of 2000 that the Fed started to ease again.”
Julian Emanuel, chief equity and derivatives strategist at BTIG, made a similar point in a CNBC interview Monday, noting “a totally different interest-rate environment.”
The tech-heavy Nasdaq Composite
soared 86% in 1999, ending the year at 4,069.30, capping a run that saw it rise from 373.84 at the end of 1990. The index pushed higher in early 2000, peaking out above 5,000 in March, but ended the year down 39%, tumbling another 21% in 2001 and nearly 32% in 2002.
U.S. stocks are on track for broad gains as 2020 comes to a close, more than erasing the bear market plunge triggered in February as the COVID-19 pandemic brought a recession to the global economy. Tech- and internet-related stocks have been big winners, benefiting as the pandemic forced people to work from home. The S&P 500
is up more than 15% in the year to date, while the more cyclically oriented Dow Jones Industrial Average
has advanced around 6%.
Colas acknowledged that there was some validity to comparisons between now and the late 1990s tech stock run-up.
“The Nasdaq is up 44% [year-to-date] and 94% over the last wo years. In 1999 it rose by 86%, so smash 2019–2020 together and you (sort of) get a 2000-style setup,” he said.
And enthusiasm for initial public offerings, electric-vehicle companies and SPACs (special purpose acquisition companies) offer some echoes of the dot-com mania of the year 2000.
But a “useful” bearish argument still needs a catalyst, Colas said, or else it’s “just a guess.” And the Fed, which played a central role in popping the earlier bubble, isn’t likely to provide one.
Colas noted that even with President Donald Trump signing an additional federal spending package over the weekend to provide aid to workers and businesses hit by the pandemic, fed funds futures give zero odds of a Fed interest rate increase through mid-2022.
That’s no guarantee that tech stocks will continue to rally, “especially in the more speculative areas of that market,” Colas said. “But it does say that we need to look for a different catalyst than what took the group down in 2000.”