Dizzying Ratings, IPO Craze Checkboxes on Bubble Checklist

Photographer: Michael Nagle / Bloomberg

The IPO market is manic. Stocks haven’t been so expensive since the dot-com era. The Nasdaq 100 has doubled in two years, leaving its valuation inflated – all as volatility remains stubbornly high.

It’s a setup that left investors sitting on big returns from 2020, a year that defied easy explanation. It is also the one with a growing cohort of experts warning of a bubble.

It is always difficult to know when market rallies go from logical to excessive. It was nearly impossible at the end of 2020, with interest rates approaching zero and the federal government freeing an additional $ 900 billion into the economy. But history offers clues and a series of currents market conditions meet criteria that would likely be on a bubble checklist.

Take a study from researchers at Harvard University published in 2019. Noted that while not all stock market outbreaks collide with disaster, those that share certain attributes, including increased equity issuance, increased volatility, and a sector or index that doubles and is twice as high as the market as a whole. Check, check and almost check.

“Are there areas of the market that are in a bubble? Yeah, clearly ”, Peter Cecchini, founder of AlphaOmega Advisers LLC, said on Bloomberg’s “What Goes Up” podcast, adding that “many of them are clearly speculative technology companies.”

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The Nasdaq 100 has doubled in the past two years

Source: Bloomberg

Stock issuance, initial public offerings and blank check companies have become so popular that record after record plummeted in 2020. US companies sold $ 368 billion in new stock last year, 54% more than the previous high, according to data compiled by Bloomberg.

IPOs raised $ 180 billion, the highest number ever, as companies like Snowflake Inc., Airbnb Inc. and DoorDash Inc. took advantage of the rebound in stock markets. According to Bill Smith, CEO and co-founder of Renaissance Capital LLC, the first-day stock price surge among newcomers was the biggest in two decades.

“These are telltale signs,” said Robin Greenwood, professor at Harvard Business School and co-author of the 2019 study. “The likelihood of a market correction is much higher today than average historical.”

A subcategory of IPOs also took off in 2020, adding to concerns. Special Purpose Acquisition Vehicles, which use the proceeds from a sale of shares to acquire a private company, raised around $ 80 billion in 2020, more than what had been recorded in total during the previous decade. PSPCs who made a purchase grew by about 100% for the year, according to research by George Pearkes, macro-global strategist at Bespoke Investment Group.

“It’s pretty bubbly,” he wrote in a recent memo, but added that what is “more remarkable” is that the PSPCs that have yet to announce agreements have won about 20%. “Obviously, this is pretty speculative behavior.”

Higher and higher

The Nasdaq 100 index is trading at a valuation multiple last seen in 2004

Source: Bloomberg

While some assets are showing worrying signs, the market as a whole may not be ready to step in immediately. On the one hand, the Federal Reserve has promised to keep interest rates close to zero, which has stretched stock valuations. seem more reasonable compared to bond yields.

And Harvard researchers say the Nasdaq 100, although on a historic run that has seen its price double in just two years, is still not sky-high against the S&P 500, compared to previous bubbles. The larger gauge has increased by 50% since 2018, and isn’t lagging the tech gauge enough to meet their criteria.

Bubble talk simmered for months, prompting many warnings from Greenlight Capital David Einhorn at Wolfe Research strategists.