The Next Tech Crash Could Delay Your Retirement By A Decade

August 14, 2017

The S&P 500 Information Technology Index recently surpassed its previous peak of 988.49 set in March 2000. It took a whopping 17 years to recoup the massive losses from the implosion of the dot-com bubble.

Not even the Federal Reserve chairman at the time, Alan Greenspan, could rein in the enthusiasm of the tech disciples with his oft-quoted 1998 “Irrational Exuberance” speech about market valuation. Valuations stretched to epic proportions as companies with little revenue and no chance to make a profit rushed to join the IPO party.

Even profitable, higher-quality names fell victim to the Ponzi scheme as growth expectations became unreasonable. In December 1999, well-known PaineWebber (now UBS) analyst Walter Piecyk assigned a $1,000 price target to Qualcomm based on the growth of wireless technology—after the company had already risen from $25 per share to more than $500 in the previous year.

It Was A Sure Sign Of The Times.

Just three months later, the NASDAQ peaked at 5,132 and begun its long downward slog to 1,114 in 2002, changing the investment landscape and the dreams of many soon-to-be retirees in the process. It took many years for the index to reach this level again.

Odds are you were not entirely invested or perhaps even in the market when this occurred. However, working in retail brokerage at the time, I saw many millions in paper profits vanish and investors’ visions of retirement wiped out in months.

Only six years later, in 2008, it would happen again, albeit due to different culprit: the subprime housing market collapsed, and financial markets ground to halt.

One would hope that two vicious declines in less than a 10-year period taught mainstream investors the value of diversification and asset allocation—but all the signs point to the contrary.

IPOs Are Being Delayed

The first warning sign is the current number of IPOs. After rising to 275 new listings in 2014, IPO activity dropped off to just 105 last year, a sign that companies are finding it harder to attract capital at desired valuations.

2017’s eagerly anticipated IPO stocks, Snapchat (SNAP) and Blue Apron (APRN), have each lost approximately 50% of their respective market values.

Blue Apron, which tried to raise $30 million, was forced to cut its IPO price to $10 in the final stages to shore up demand. (It had initially wanted to raise $480 million and offer shares in the $15 to $17 range.) Both companies are burning through cash at staggering rates.

Additionally, many companies have delayed IPOs this year due to “unfavorable market conditions,” a.k.a. weak investor demand. The demand for new listings is generally a good indicator of market cycles and investor sentiment toward risk.

The Big Five Are Propping Up The Whole Market

Another notable development is the concentration of companies making up the NASDAQ.

The combined market caps of Apple (AAPL), Alphabet/Google (GOOGL), Microsoft (MSFT), Facebook (FB), and Amazon (AMZN) now exceed $3 trillion—that means these five companies comprise almost a quarter of the entire $12.5 trillion index containing more than 3,100 companies.



Source: Bloomberg

If these five companies were a separate index, it would be larger than the total value of stocks in any single equity market worldwide, except the five largest: the US, China, Japan, Hong Kong, and the UK.

The market value of the “Big Five” has shot up 30% so far in 2017, with Apple rising almost 40% and Amazon 25% to more than $1,000 per share.

Due to its impressive ascent this year, Apple is well on its way to becoming the first company to be valued at $1 trillion—a truly impressive and well-deserved feat, given the domination of the iPhone over the past decade.

However, 75% of sell-side analysts still rate the company a “buy” in anticipation of strong iPhone demand when the 8th version is released later this year.

Reminiscent of the $1,000 Qualcomm price target in 1999, TheStreet.com just predicted Apple’s valuation to reach $2 trillion within 10 years. It based their forecast on the company’s huge cash position and ability to make acquisitions—never mind that it’s still $170 billion away from even the $1 trillion mark.

The ETF And Index Fund Craze

A key driver of market concentration and a potential source of risk is the proliferation of low-cost ETFs and index funds, or so-called passive investments.

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