US stockmarket bubble just keeps getting bigger

Despite the shine coming off tech stocks this week, valuations have been boosted by loose money and government spending. 

Could US stocks be heading for their very own “1980s-style Japanese melt-up”? asks Ian Harnett in the Financial Times. The dovish duo of Janet Yellen at the Treasury and Jerome Powell at the US Federal Reserve are boosting valuations by drenching markets with loose money and state spending. 

The market’s current valuation philosophy is “basically to ignore it”, says Eric Savitz in Barron’s. The likes of Zoom Video Communications and Shopify trade on more than 35 times estimated sales – sales, not profits. Yet an end to the pandemic, which will let us spend more time away from the internet, is starting to take the shine off tech stocks.

The tech-heavy Nasdaq 100 is down more than 4% since a recent high on 12 February. The parallels with the dotcom bubble are multiplying, says James Mackintosh in The Wall Street Journal. In the late 1990s any share with “dotcom” in its name could be expected to rally whether it was an internet business or not.

Today investors pile into “story stocks”: witness the recent jump in biotech firm Signal Advance, which speculators had mistaken for WhatsApp-style messenger service Signal. Yet there is one big difference from the dotcom bubble: this time the Fed “has the market’s back” and remains committed to keeping interest rates low. That means these pricey valuations rest on more than just speculative froth.

“All history’s... speculative bubbles” have been fuelled by “cheap money”, says John Authers on Bloomberg. They usually only pop when monetary conditions are tightened (Japan’s asset-price implosion came after the central bank began hiking interest rates in 1989). With the Fed intent on keeping money ultra-loose for the foreseeable future that reckoning – and the “bubble’s final paroxysm” –may still “be months away”

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