Tuck your white polo shirt into your pleated khakis; check your Outlook account like you’re in a Tom Hanks/Meg Ryan RomCom; and fire up your soft-top Jeep.
Because the stock market’s time machine has just spat us all out in the year 1999. We are all once more in the maw of a speculative frenzy — as no one whose watched what’s happened to GameStop over the past few days would dare deny.
And plenty experts are warning that — like the dot-com bubble of a generation ago — it’s bound to end badly for investors that get carried away.
Here’s five ways the current stock market is repeating history.
1. Stock market valuations are sky high
Once again, there’s a “belief in long-term perennial growth,” said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.
The leading indicator of market madness is valuations, the price of stocks compared to what the underlying companies actually earn.
The Nasdaq 100, the index tracking the largest stocks on the tech-heavy market, currently boasts a price-to-earnings ratio of 40 times. That’s not quite the crazy 100-plus levels of 1999, but many of the individual stocks could slot right into that year’s lineup.
This year’s Cisco Systems award for “sticker-shock valuation” goes to Tesla, which is trading at roughly 800 times earnings, according to Nasdaq. Like Cisco, Tesla is priced based on the idea it will lead the economy into a new era, this time the era of green power rather than the Internet. Talk of “new paradigms” was one of many danger signs for investors in 1999, according to economist Robert Shiller, who wrote the book on the “irrational exuberance” of the Dotcom bubble.
But at least Cisco and Tesla make money.
The Pets.com award for “what the…? valuation” has to be a tie between troubled video game rental chain GameStop and cinema chain AMC Entertainment. Like smaller Dotcom companies including Pets.com and Broadcast.com, their prices have gone exponential even as their losses mount.
Nothing but hysteria can explain what brokerage Goldman Sachs called “the dramatic outperformance of shares with negative earnings.”
2. IPOs are making headlines
One tech executive joked that raising capital in the late 90s was easier than finding free love in 1969. All you needed was a sketchy business plan and an investment banker.
Everybody wanted in on initial public offerings, particularly after tiny chat-room hub TheGlobe.com rose sevenfold on its debut, the biggest ever such gain.
Now, you don’t even need the sketchy business plan. Sure, there are throwback IPOs, stocks that have actual businesses attached, like software company Snowflake and home-sharing Web site Airbnb.
But most of the 2021 frenzy is in stocks that don’t even have a five-page prospectus talking about “first mover” and “emerging growth opportunities.” These are the Special Acquisition Companies, or blank-check companies, where operations are almost an afterthought. A “seasoned team of investors,” backed by bankers, raise money on the stock market, and, once they’ve seasoned themselves a little more by champagne dousing, the team might get around to actually buying and running a venture.
Financial engineers have figured out a way to put the cart before the horse, and equity investors, small and large, can’t get enough of it.
By Goldman Sachs’ estimates, there have been 16 SPAC deals raising $56 billion so far in 2021. We’re not even through the first month yet.
3. Day traders are back
1999 was also the last time that millions of Americans took their eyes off their careers and put them firmly on a trading screen, convinced they’d never have to work again.
Back then, day traders thronged in Main Street brokerage booths and chat rooms on Yahoo Finance. As David Denby, a film critic, who got sucked into the activity at that time, later reminisced, the feeling then, like now, was that anyone could do it: “If you could just grab hold of the flying coattails of the New Economy investments, you could get rich very quickly.”
The stock market is once more overrun by a crowd of amateurs that institutional investors are derisively dismissing as “retail bros.” A merry band of traders on the commission-free Robinhood app are staging gleeful, coordinated raids on stocks.
In 2000, there were hundreds of Yahoo Finance chat rooms…almost every stock had its own room.
Now, the Robinhood band gather in numbers of roughly 1.8 million on the Reddit subgroup r/WallStreetBets. That’s how they were able to stare down giant hedge funds such as Melvin Asset Management, who were betting against GameStop, effectively winning a game of chicken by pushing up the stock until the hedge funds were forced to capitulate.
4. Scorching hot mutual funds
Investors are once again throwing money at funds that post triple-digit performance.
Every market has hot stocks but the late 1990s had hot mutual funds, too. By loading up on Dotcom stocks hand over fist, funds such as Munder NetNet and Janus Technology Fund posted mouth-watering gains, then unheard of for sleepy retirement-account offerings.
Cue the stampede of small investors, and the inevitable collapse.
Now investors are clamoring for funds such as Ark Invest’s Next Generation Internet exchange-traded fund, which returned more than 150% for 2020. Once more, new investors are asking the wrong questions: focusing on how much did the fund make last year, rather than what does it invest in and what are my risks?
Those piling into hot funds are “assuming past performance leads to future gains,” said Christine Benz, director of personal finance at Morningstar. That’s basically the diametric opposite to the oldest adage in fund investment: past performance does not guarantee future returns.
5. Hucksters are getting famous again
In the mania, only the loudest and most enthusiastic voices can carry.
Jim Cramer gave voice to the late 1990s frenzy. By turns hoarsely euphoric and calmly vituperative, he mimicked the charts of the stocks he touted.
The voice of the market this time must be the Fenway heckler Boston accent of Dave Portnoy, the former sports blogger turned market savant. Cramer arguably set in motion the FAANG phenomenon with his “four horsemen,” while Portnoy helped inspire the second-half comeback of the stock market in 2020, coining the apocryphal-but-fun motto: “Stocks only go up.”
Cryptocurrency boosters such as Roger Ver, known as “Bitcoin Jesus” and the Winklevoss twins, may also be remembered for their fervor.
And then there’s the digital voices: Redditors such as Roaring Kitty, who rallied the masses on the platform as they raided the hedge funds, with all-cap cries like: “WE’RE BREAKING THROUGH! HOLD!”