Tech Bubble Party Hits Sharp Reality, Nasdaq Smashed More Than 5%

Tech Bubble Party Hits Sharp Reality, Nasdaq Smashed More Than 5%

tech bubble
Tech bubble party hits sharp reality, Nasdaq smashed more than 5 percent. Is the stock market reconnecting with the underlying economy? Image: WOCinTech / Flickr

Tech stocks fell sharply on Wall Street Thursday, losing some of their unbelievable gains made over the last few months and dragging the rest of the market down with them.

The tech-swollen Nasdaq fell 5.2 percent. The S&P 500 was down 3.8 percent and set for its biggest drop since June amid declines in Apple, Microsoft, Amazon and Facebook.

The Nasdaq is still up 27.4 percent for the year.

Big Tech companies made monster gains in recent months. Some investors bet on tech stock profits as the pandemic raged on, with people using their devices more than ever while working and playing online at home.

Investors question the justification for steep tech company valuations, and market watchers have been asking if another stock market crash is coming in 2020.

The stock market capitalization-to-GDP ratio, aka the Buffett Indicator, is a tool used to determine whether the market is undervalued or overvalued compared to its historical average. It’s showing that stocks are more overvalued than they’ve been since 1971, Moneymorning reported.

As of Aug. 27, the Buffett Indicator was 67 percent higher than the historical average — a level not seen since the internet bubble of the early 2000s.

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The U.S. job market picture remains bleak. Companies are still letting workers go at a rate greater than the Great Recession. Since the pandemic began, initial jobless claims have increased by more than 58 million. Up to a quarter of small businesses in the U.S. could be shut down for good before the economic crisis is over, taking 10 percent of all U.S. jobs with them. GDP is down almost 33 percent. Meanwhile, U.S. health officials said they expect a covid-19 vaccine to be ready by Nov. 1, just before the presidential election.

Stocks have held up reasonably well since the March 23 bottom because the U.S. Federal Reserve printed and injected $5 trillion into the economy, which inflated the value of U.S. stocks, Moneymorning reported.

U.S. investors may need evidence of a fuller economic recovery after a 60 percent increase in the S&P 500 since its low in March, according to Bloomberg.

“There’s really very little to justify (these big stocks’ upward move) other than euphoria,” said Mark Hackett, chief of investment research at Nationwide.

Tech stocks, which account for a significant piece of the U.S. stock market’s value these days, fell across the board. Apple dropped 7.1 percent, Amazon lost 5.5 percent and Facebook went down 5.1 percent. Semiconductor stocks also fell sharply, Star Tribune reported. Nvidia, Qorvo and Advanced Micro Devices fell 8 percent or more.

Stocks can remain overvalued for an extended period but at some point they have to fall, and the market cap-to-GDP ratio will decline just to revert back to the mean, Moneymorning reported.

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While it’s true that the stock market has disconnected from the underlying economy, this isn’t the first time it has happened.

The previous record high overreading was 49.3 percent on Jan. 26, 2018. Two weeks later, the market experienced a 10-percent correction.

Before that, the highest reading was 49 percent overvalued in March 2000, just as the dot.com tech bubble burst. That sent the S&P 500 about 50-percent lower before it started rebounding.

If valuations remain extremely elevated for an extended period, the market will experience an even more serious decline when the correction finally comes.

Money Morning