Sharp swings in tech market prices are raising alarm about the “Dotcom Crash” of the past, although the involved companies are no longer fragile startups that existed two decades ago. Billionaire investor Stanley Druckenmiller said last week as the markets responded with volatility amid fears that a new tech bubble is almost bursting.
“Everybody loves a party … but, inevitably, after a big party, there’s a hangover. Right now, we’re in an absolute raging mania.”
Sometime this week it seemed like the tech bubble was about to burst again. On September 8, Tesla’s shares fell 21% which made Elon Musk’s net worth drop by $16.3bn (£12.7m). that is the biggest one-day wipe-out ever for a billionaire. Amazon’s Jeff Bezos lost $7.9 billion.
The volatility and losses dominated most of the week but many market commentators believe that it is too soon to say that the tech bubble is bursting.
Stock Markets Plunge After Massive Sell-Off Amid US Job Fears and old Dotcom Crash
The sums lost are significantly high. Musk’s $16.3 billion loss is the amount that China set aside to combat coronavirus in March. But, the losses have barely dented the historic fortunes the ‘technocrats’ have amassed. For now, tech’s dominance is still intact.
These US tech giants have increased in value since COVID-19 hit the United States in March. Bezo’s fortune has increased by $69.3 billion since the start of the year while Musk’s fortune is up by $64 billion. If this is a tech bubble, it consists of stronger components than the one that burst in 2000.
That bubble was spearheaded by Pets.com which went out of business nine months after its much-hyped share sale. On the other hand, the current tech market ‘bubble’ is inflated by some of the biggest and most profitable firms the world has ever seen.
The co-founder of analytics firm DataSwarm, Alan Patrick, has seen many tech bubbles previously but does not consider the current one to be a bubble about to pop. With the tech stock prices quite high, he thinks that we are only at the “foothill of bubble phase”. He added:
“The rise has mainly been from companies that stand to profit hugely from a world that has a ‘phase shift’ to a more digital, less physical world – Zoom, Amazon, Microsoft, Netflix, Apple all benefit hugely, as do the COVID drug and healthcare companies whose shares have rocketed.”
In August, Apple’s valuation passed $2tn and in September it is worth more than all the firms listed on the FTSE 100 index of Britain’s largest firms cumulatively. Thus, size is a big difference between the current tech giants and their dot-com predecessors.
Tech Is Booming
Apple, Amazon, Facebook, and Google have enjoyed booming business even as the wider American economy has tanked. Thus, the tech market has become a haven industry achieving growth while investors elsewhere are struggling to find growth and safety. Although the situation is different this time around, “All of the elements of a bubble environment remain in place,” according to Chris Senyek of Wolfe Research.
Almost 29 million Americans are still on unemployment benefits and the economic bounce-back from the lockdowns has slowed. But, the US stock markets are ranging near their all-time highs as the Federal Reserve endorses them and maintains interest rates at near zero. But for many analysts like Senyek, the recent sharp drops may indicate trouble ahead:
“Typically, bubbles are unwound when the Fed takes away the punchbowl. Obviously, this is very unlikely to happen any time soon. However, this bubble can still be unwound by sustained economic disappointments.”
The recent stock splits by Apple, Tesla, and many others made their shares cheaper to buy without changing the fundamentals of their businesses. Also, a huge bet on tech by the Japanese conglomerate SoftBank tied around $50billion worth of individual tech stocks pushed the markets higher.
The real problems may arise when the health crisis ends. Tech thrived when the world shifted many businesses online. But, will people continue with zoom meetings once the pandemic is over? Technology may have taken over some sectors of the global economy but its current dominance may fade after the real world reopens.
Tech may finally encounter real political opposition after Europe and the US government have become concerned about Big Tech’s dominance. Hence, there are so many possible shocks that can stop the developing bubble.
Analysts Have Their Take On The Tech Market
DataSwarm’s Patrick believes that more classic bubble signs must develop before any actual blowout in the tech market. He is on the lookout for:
“Large numbers of consumers being sucked into investing – though that is starting, with new financial trading apps offering free share dealing and owning fractions of shares in companies”.
But, anything is possible in the current environment. Many factors may result in a stock market implosion including a second wave of the coronavirus pandemic and the dire economic news or the outcome of the forthcoming US election. Patrick added:
“I don’t think there has been a time, probably since the end of the Cold War, when there are so many highly possible very large shocks that could stop the developing bubble in its track and crash it.”
Druckenmiller told CNBC:
“If and when that unwinding will happen is anyone’s guess. I have no clue where the market is going to go in the near term. I don’t know whether it’s going to go up 10%, I don’t know whether it’s going to go down 10%.”
Druckenmiller believes that the next three to five years will be quite challenging.