Has the bubble already deflated?


Have Tech stocks gone on sale?

As the liquidation of bubble assets begins to widen and accelerate this year, many experts suggest that the bubble has already deflated. This sentiment is understandable given that the big tech-focused indices are well into correction territory. Beneath the surface, nearly 70% of tech stocks are in a bear market, with almost a third down more than 50% from their highs. Just a few months ago, many investors crashed to pour more money into the NASDAQ 100 at 16,000. So, with the index now trading closer to 14,000, it’s no surprise that it appears to some as a significant buying opportunity. History says it may still be too early.

Most tech stocks are already in a bear market

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After the peak of the tech bubble in March 2000, a combination of peak growth and tighter liquidity quickly pushed tech stocks into bearish territory, and just two months after the peak, more than 90% of the sector was in a bear market and nearly 70% were down more than 50% (Chart 1). Perversely, the mother of all dead cat bounces caused tech stocks to rebound over 30% and recoup nearly two-thirds of those initial losses. Many investors were prompted to retrace these stocks, only to be followed by another 82% decline over the next two years (Chart 2).Has the bubble already deflated?

How will we know that the bubble has burst?

During the previous tech bubble collapse, the technology and telecommunications (now renamed communications services) sectors fell from a combined weight of 41% of the S&P 500® to a low of 16% in 2002. the significant underperformance of technology and communication services in this correction, the combined weight of these two sectors only fell from 40% to 38% (chart 3).


Here are several signposts that might be helpful in determining when the bubble is truly deflated:
Has the bubble already deflated?

  • Valuations will contract significantly and the IPO market will enter a cold period.
  • Tech and cryptocurrency analysts will go from heroes to villains.
  • The number of technology-based investment products, such as ETFs, will decline.
  • Business media will cancel TV segments and news columns devoted to technology and innovation.
  • People will no longer quit their jobs to join early-stage startups or trade cryptocurrencies.
  • No one will care to read a report like this about when the bubble burst.

Dan Suzuki, CFA

Deputy Director of Investments

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