Sad prices, IPO craze ticket boxes on bubble checklist

Photographer: Michael Nagle / Bloomberg

The IPO market is manic. Stocks have not been as expensive since the dot-com era. The Nasdaq 100 has doubled in two years, leaving the valuation in full swing – while volatility remains high above.

It is a situation that leaves investors sitting on fat yields from 2020, a year that rejected an easy explanation. He is also one with a growing group of experts warning about a bubbles.

It is always known when market rallies turn from being logical to excessive. It was almost impossible as 2020 came to an end, with interest rates tied near zero and the federal government distributing another $ 900 billion into the economy. But history offers insights, and several streams market conditions meet criteria that would be likely to be found on a bubble checklist.

Take a study by Harvard University researchers published in 2019. It fa-near while not all stock increases will meet a catastrophe, those that have some effects, including an increase in share, more volatility, and a share or index that is ‘and is twice as high as the market as a whole. Take a look, check and almost check.

“Are there areas of the market that are bubbles? Yeah, clearly, ”Peter Cecchini, founder of AlphaOmega Councilors LLC said, on “What Goes Up” with Bloomberg podcast, stating that “many of these are speculative technology companies.”

Flag time

The Nasdaq 100 has doubled over the past two years

Source: Bloomberg

Distribution of shares, initial public offerings and blank check companies have grown so much that record-breaking fell in 2020. U.S. companies sold $ 368 billion in new stock last year, 54% more than the previous year. previously high, according to data compiled by Bloomberg.

IPOn they raised $ 180 billion, the highest ever, as companies included Snowflake Inc., Airbnb Inc., and DoorDash Inc. taking advantage of the reversal in equity markets. The first day in share price pops were among the biggest newcomers in two decades, according to Bill Smith, CEO and co-founder of Renaissance Capital LLC.

“These are descriptive signs,” said Robin Greenwood, a professor at Harvard Business School and co-author of the 2019 study. “The probability of a market correction is much greater today than it is in the historical average. ”

A subclass of IPOs also began in 2020, adding to concerns. Special purpose construction vehicles, which use money from stock sales to acquire a private company, raised about $ 80 billion in 2020, more than was fully reaped over the previous decade. SPACs made up 100% for the year, according to a study by George Pearkes, a global strategic macro at Bespoke Investment Group.

“That’s a very exciting thing,” he wrote in a recent note, although he said it was “more surprising” that SPACs that have not yet announced contracts have received around 20%. “Obviously, this is very speculative behavior.”

Higher and Higher

The Nasdaq Index 100 trades at a valuation multiplier last seen in 2004

Source: Bloomberg

While some assets have worrying signs, the general market may not be entering immediately. For one, the Federal Reserve has promised to keep interest rates close to zero, making stock valuations stretch. look more reasonable compared to bond yields.

And Harvard researchers say the Nasdaq 100, while on a historic run that has seen its price double in just two years, has not yet risen slightly compared to the S&P 500 Index, compared to previous bubbles. The broader benchmark has accumulated 50% since 2018 and does not slow down the tech-heavy benchmark enough to meet their criteria.

Talk of bubbles has been like months, prompting plenty of warnings from the likes of Greenlight Capital David Einhorn to Wolfe Research strategists.