Narrative Investing: The Lockdown-Led Tech Rally Is Nothing Like the 1999 Tech Rally… Right?

Shah Gilani Aug 26, 2020
1 

Don’t worry, be happy.

The roaring tech rally of 2020, courtesy of the Great Lockdown, courtesy of COVID-19, is nothing like the roaring tech rally of 1999 that led to the Tech Wreck of 2000.

At least that’s the investing narrative making the rounds now.

The story is, everywhere comparisons are being made between the irrational exuberance that led to the Nasdaq Composite crashing 50% in 2000 and the tech rally of 2020 where five stocks have led millions of investors up the yellow brick road, is that there is no comparison.

I beg to differ…

Irrational Exuberance and the FAAMG-Five

Narratives being what they are, here’s another interpretation of the same love story, only with different tech stocks, but maybe the same ending.

Let me haircut chapter one by saying we’re not comparing similar characters.

Most of the irrational exuberance, meaning blind money rushing into stupid tech names throughout the late 1990s, especially from August 1999 to March 2000 when the Nasdaq Composite doubled, went into companies that had no earnings, no profits, and for most of them, no right to be public companies.

But they had “eyeballs;” people flocked to their websites, not to buy much of anything, but to gawk and talk about the “Internet.”

Today, the companies leading benchmarks, retail brokerages, and traders’ bank accounts higher are mostly the FAAMG gang, Facebook Inc. (NasdaqGS:FB), Apple Inc. (NasdaqGS:AAPL), Amazon.com Inc. (NasdaqGS:AMZN), Microsoft Inc. (NasdaqGS:MSFT), and Google – or Alphabet Inc. (NasdaqGS:GOOGL) if you prefer, but that ruins the FAANG thing, or FAAMG gang as it now stands.

These companies have it all.

Boy, do they have eyeballs – billions of them, literally. And they have the “ecosystems” and “moats” and revenues and profits and cash to prove it. They’re all fabulously rich, as are their founders, as are their stockholders, as are all the market indexes they dominate.

Take the institutional benchmark of equities in the United States, the S&P 500, the FAAMG-Five account for 25% of the capitalization of that index, that measure the financial press calls “the stock market.”

Forget the other 495 companies in the S&P 500, or the thousands of other stocks investors can buy, the FAAMG-Five are being flooded with investment and traders’ capital because they make sense.

Yes, they make sense because like Arby’s, “They have the meat!”

But, it’s still irrational exuberance for so much money to be poured into so few stocks.

What the Narrative is Really About

It’s irrational that five stocks are behind the greatest, shortest market rally in history, especially considering we’re in the middle of a global pandemic and a recession that’s going to leave millions of Americans out of work, permanently.

This narrative isn’t even about metrics. It’s not about how price-earnings ratios for the FAAMG-Five are higher now than many of the tech stocks that crashed in 2000. Or more importantly, how the PE on the S&P 500 is higher now than it was in 2000.

The story is that much higher multiples are justified, simply put, because earnings are growing like gangbusters.

It doesn’t matter that earnings don’t grow forever.

It doesn’t matter that the last time five stocks made up 25% of the S&P 500 was in 1970 and they were AT&T Inc. (NYSE:T), Exxon Mobil Corp. (NYSE:XOM), General Motors Co. (NYSE:GM), International Business Machines Corp. (NYSE:IBM), and wait for it, Eastman Kodak Co. (NYSE:KODK), any more than it matters that some of those companies have fallen from grace, their earnings decimated.

None of that matters.

What matters is the story, the feeling telling the story gives you, that the market’s on a tear, that everything’s going to be great again, because these five companies’ stocks are going through the roof.

And because every good story keeps you in suspense, I’m going to tell you on Friday why, how, and when this narrative is going to end.

Sincerely,

Shah

One Response to Narrative Investing: The Lockdown-Led Tech Rally Is Nothing Like the 1999 Tech Rally… Right?

  1. Roy Ritola says:

    looking forward to it

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