Dear Mr. Market:
Do you remember what happened right before the peak of the dot com bust? Before rehashing any history let’s quickly revisit a quote that has been used and altered by several over the years:
“Those who cannot remember the past are condemned to repeat it.”
– George Santayana (former Harvard professor and philosopher)
Right before the needle slowly approached the overly inflated (tech/internet stock) balloon in late 2000…it was not uncommon for a financial advisor to field phone calls requesting to buy stocks like Cisco Systems (CSCO). OK…at least one could make a case for a company like that, albeit overvalued, as they actually earned money and had a viable business plan. It’s when those phone calls turned into “how about we also buy some of this stock I’ve heard called EToys?” Investors…(cough)…speculators poured money into so many internet startups with the hopes that these companies would one day turn profitable. We all know how this party ended and like many other past bubbles it won’t be the last.
The FOMO (fear of missing out) was real. Back then it brought people to fool themselves into thinking they were investing as opposed to speculating. Buying stock in a company that you have zero clue about, know nothing about their business, numbers, industry, or competition is not investing; it’s chasing. We’re seeing that again but perhaps with a slightly different flavor.
Lately, we’re starting to see people who had been on the sidelines buying Apple, Tesla, or asking about gold, bitcoin etc. Speculative endeavors and bubbles are always hard to recognize while they inflate but pretty obvious once they burst. While we don’t think tech is done…the simple observation of too much too soon has been ignored. For a quick refresher on how the Nasdaq fared during the Dotcom bubble, from peak to trough it dropped -76.81%. Obviously it’s of course rebounded and done amazingly well but it took 15 years to come back! As usual, people get complacent and forget that no one sector is bulletproof. Until this past week, it was easy money again which builds false confidence and encourages “amateur hour”. The tech heavy Nasdaq just saw the fastest correction in its history and those with short memories may need a healthy reminder that we’re still not out of the woods yet.
Without any intent of being “doom and gloomers”, here’s something to chew on. Large U.S. corporate bankruptcy filings are on pace to potentially surpass the all-time high set in 2009, according to Bloomberg. Year-to-date through August, there were 180 bankruptcy filings by companies with over $50 million in liabilities. In 2009, that total reached 271 for the full-year. Twenty companies filed last month, the worst August on record. We’re not saying that some of the stocks we’re seeing on the tip of everyone’s tongue (Tesla, Apple, Amazon etc) are going to go out of business, however, your eyeballs need to be open about the broader health of the market. As My Portfolio Guide, LLC clearly covered in the last newsletter edition of “the Guide” , the breadth of the market has been driven by mega cap tech names (and the Fed…insert loud courtesy chuckle here!). Anything that moves this strong to the upside has to eventually take a breather. The chart above shows how fast tech has moved relative to its 200-day moving average. For some final context, we’re not quite at nose bleed levels of the Dotcom bubble where these mega cap tech names trading at about 55% of their 200-day moving average, but definitely overheated in the short-term.
This recent market recovery was due to correct at some point. It’s no secret that all eyes will focus on the election but before then it should come as no surprise that some steam needed to be blown off. With the advent of novice investors being lured into this game via platforms like Robinhood, the buy the dip crowd, and then the FOMO folks…you’re going to see increased volatility. Don’t get duped into thinking that we’re headed right back to the devastation that occurred earlier this year; while that could eventually happen again, this current correction is actually healthy, fairly predictable, and in a sense much needed. Don’t be surprised to see the S&P 500 get back to 3,505 (or higher) before the election (we’re currently around 3,339 as of this writing so roughly 5% off that level).
Lastly, often times investing is made more complex than it needs to be. Conversely it’s not so simple that anyone can do it but the truth and balance rests somewhere in between. We leave you with one final quote to help summarize one point of view from a legendary investor…not speculator.
“Know what you own, and know why you own it.”
— Peter Lynch