This Stock Market Rally is Different Than the Dot-Com Bubble
Many investors have grown weary of the recent stock market rally, comparing it to the dot-com bubble in 2000. This skepticism is being driven by a massive inflow of capital into companies that have not recorded any revenue or profit, similar to what happened in 2000 and the years leading up to it. This year alone, the tech-heavy Nasdaq index is up 44 percent year-to-date. In 1999, the Nasdaq rose 86 percent.
"So, smash 2019 - 2020 together and you (sort of) get a 2000-style setup," DataTrek co-founder Nicholas Colas said. However, the major difference between today's rally and the dot-com bubble is interest rates. The Federal Reserve played a key role in popping the dot-com bubble. The central bank hiked interest rates right around the peak of equities, increasing the cost of borrowing and decreasing the incentives for investing.
"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 cooling the booming US economy," Colas continued. In 2000, the Fed Funds rate was around 5.85 percent which allowed investors to explore alternatives to equities for a decent return, many turned to bonds.
Currently, the Fed Funds rate is between 0 and 0.25 percent which leaves investors with slim pickings for returns. Furthermore, the Fed has explicitly stated that it has no plans to raise interest rates for several years.
"This doesn't guaranty Tech will continue to work, especially in the more speculative areas of that market. But it does say that we need to look for a different catalyst than what took the group down in 2000," Colas said.
This does raise a question about a potential catalyst that could pop the suspected "bubble." Unprecedented economic measures could give us an answer here soon.