The stock market's robust rally and Wall Street's optimistic mood have a growing number of observers worried, including investors, strategists, and even high ranking officials of the Federal Reserve. The “market is up almost every day, and one can almost bank on a ramp higher during the last 15 minutes,” Doug Ramsey, chief investment officer (CIO) at The Leuthold Group, said in a note cited by Barron's. "'Corrections’ are now events that last hours, not days or weeks,” he added.
The growing concern is that we are witnessing a replay of the Dotcom Bubble of the late 1990s, based on several troubling parallels. The table below and the discussion that follows cover key points in Barron's detailed analysis.
7 Signs Of A New Bubble
- Venture capital investments in tech companies at excessive levels
- A rush of highly-touted tech IPOs coming to market
- Financial crises in emerging market countries
- The Fed paused interest rate hikes in 1998, as they have now
- Tech stocks lead the market in 2019, as they did in 1999
- Almost daily gains in stock prices, with little retreat
- Growth stocks outperforming value stocks
Significance For Investors
Barron's offers two more parallels between the Dotcom Bubble and 2019: a yield curve inversion, which normally signals an upcoming recession, and U.S. stocks outperforming other global markets, partly due to a strong U.S. dollar.
The yield curve inversion in 2019 was brief, leading some analysts to discount it as a reliable recessionary indicator this time. Also, an inversion in 1998 was partly the result of two major crises without parallels today: a default by Russia on its sovereign debt and the collapse of Long-Term Capital Management (LTCM), a large hedge fund devised and managed by some highly-regarded figures on Wall Street.
High-ranking Federal Reserve officials are weighing in with their concerns. These include Richard Clarida, vice chairman of the Fed's Board of Governors, and Charles Evans, president of the Federal Reserve Bank of Chicago and a member of the Federal Open Market Committee (FOMC), which makes monetary policy decisions. Both are economists by training and profession, and both have given recent speeches in which they compared the Fed's current pause in interest rate hikes to a 1998 pause that, in retrospect, may have helped to fuel the Dotcom Bubble.
The technology sector of the S&P 500 is off to its best-ever start to a year, according to Dow Jones Market Data cited by The Wall Street Journal. Through the close on April 9, the S&P 500 Information Technology Sector was up by 22.27% year-to-date, versus 14.81% for the full S&P 500, per S&P Dow Jones Indices. This is surprising to many, given that tech was beset by worries about high valuations and possible limits to growth only a few months ago. "When people get nervous about the market, these companies pull back," as Michael Lippert, manager of the Baron Capital Opportunity Fund, told the Journal.
The market could receive a big jolt soon. According to Bob Farrell, a veteran technical analyst and market strategist, expect stocks to rally further, reaching new highs as investors act on so-called fear of missing out, or FOMO. But then, watch out. "We are very much focused on the possibility that once you get to new highs, there'll be too much complacency. And when the markets reverse, they're reversing without warning," he said at conference quoted in another Barron's article.