BTIG Analyst: Stock Market Valuations Are Like 2000 Bubble Before The Dot-Com Crash

Written by Dana Sanchez
Bubble in the finance world. Credit: Petrovich9 / istock

Market historians are comparing the incredible year of 2020 to 1999, when the S&P 500 closed at an all-time high brought on by the dotcom boom, only to be followed by a devastating correction in the first few days of 2000 when the dotcom bubble burst.

The major indexes are trading at or near record highs and the market rally’s intensity over the past six months since the March low of the covid-19 crisis seems to look a lot like what Wall Street saw 20 years ago, CNBC reported.

“The participation is on a par with 2000, if not greater,” said Julian Emanuel, chief equity and derivatives strategist at investment banking and stockbroker group BTIG, on CNBC’s “Trading Nation”. “It’s pushed valuations to an equivalent level to where they were in 2000.”

However, this is a different environment than in 2000, Emanuel said — one more conducive for sustainable gains with companies delivering real revenues to investors.

There are some parallels between the 2000 and 2020 markets. The Nasdaq is up 94 percent over the last two years and up 44 percent year-to-date. In 1999, the Nasdaq surged 86 percent. The S&P finished 1999 up 19 percent, then fell 10 percent in 2000.

There’s one major difference between the dot-com bubble and today, and that difference could mean a continued rise in stocks from current levels: interest rates, Business Insider reported.

The Federal Reserve helped burst the 2000 tech bubble when it raised interest rates to new cycle-highs around the same time stocks peaked.

In 2000, the Fed Funds rate was near 5.85 percent, so investors had an alternative to booming tech stocks by getting a decent return from bonds. Today, the Fed Funds rate is near zero, and investors have no similar alternative.

“The tech sector began to roll over as soon as it became clear that the Fed was intent on taking short term interest rates to new cycle-high levels and cooling the booming U.S. economy,” said DataTrek co-founder Nicholas Colas.

“It’s a totally different interest rate environment, and there’s a lot of cash on the sidelines. That wasn’t necessarily the case,” Emanuel said. “And if anything, the economy is waiting to accelerate, which we think happens on a global basis in 2021.”

Emanuel told CNBC that he thinks the worst thing that could happen is a 10-percent to 15-percent pullback. The most-likely catalyst to spark a correction would be related to the coronavirus vaccine and distribution, Emanuel speculated. And he said he thinks the fallout will be temporary.

“We’re not looking for anything terribly dramatic on the downside,” Emanuel said. “Given the backdrop of monetary and now fiscal accommodation and accelerating earnings, we think that would be a buying opportunity.”

John Hardy, head of FX strategy, at Saxo Bank, prepared his clients for a bumpy start to 2021 in a note to clients published on Monday.

“The initial few days of the year 2000 saw a vicious correction,” Hardy reminded clients, as reported by Market Watch. “Yes, times were different, and the focus then was on Y2K and the concentrated bubble of the time, but investors need a reminder that even during major bull market runs, one can see significant setbacks.”

The Fed doesn’t expect to raise interest rates until at least 2023. It’s focused on revitalizing the economy from the covid-19 pandemic as a second round of stimulus checks heads to millions of Americans’ bank accounts.

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“This doesn’t guaranty tech will continue to work, especially in the more speculative areas of that market,” Colas said. 

Even if there is a pullback, BTIG’s Emanuel said, “In an environment where the Fed has blessed banks for turning capital, we think that sector is under-owned, very attractively valued and has substantial earnings power.”

He said he thinks banks will help the S&P 500 achieve a 4,000 price target for the end of 2021.

“This far into the bull market, you take it in chunks of six to nine months,” Emanuel told CNBC. “Looking forward nine months, and when we look forward, we do see higher prices even if you do get the pullback.”

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