There are numerous other echoes to the tech craziness of the late 1990s.
Investors partying too much like 1999?
Blank check SPAC mergers may not have been popular more than twenty years ago. But there was another hot financial trend at that time that was also a sign of market froth — companies spinning off their online divisions or setting up so-called tracking stocks for them.
Tracking stocks were even more ridiculous than dot-com spinoffs.
With a tracking stock, a company would sell shares of a business unit that merely tracked the performance of the division. But investors who owned the stock didn’t have the right to vote on company matters like investors in other public companies did.
None of these tracking stocks exist anymore.
IPO and SPAC bubble and concerns about pricey valuations
There were also plenty of unprofitable companies rushing to go public, despite having little in the way of revenue let alone profits.
The spectacular collapse of Pets.com stock after its IPO in February 2000 — just before the Nasdaq peaked — is still the poster child of wretched market excess.
Still, the valuations for many of these stocks are certifiably insane considering that many of the companies are still not profitable — even though their revenues are substantial and growing rapidly.
According to data from FactSet, the S&P 500 is currently trading at more than 21 times earnings estimates for the next 12 months. That’s above the five-year average of just under 18 and the 10-year average of nearly 16.
It’s also approaching the peak March 2000 levels of 24 times earnings estimates. In other words, the market is priced for perfection.
That’s problematic. If (or when) the most bubbilicious stocks finally start to pull back, the sell-off can last a long time and the damage could be severe.
So last year’s brief bear market pullback following the beginning of the Covid-19 outbreak in March could be just a small taste of what’s to come for tech and momentum stocks.