U.S. Stock Market in the midst of another tech bubble

By Sylvain Saurel

Elon Musk’s been in the headlines for the last few days. The brilliant founder of Tesla and SpaceX has just overtaken Warren Buffett in the ranking of the richest men on the planet. The incredible success of Tesla on the stock market for almost a year is not unrelated to this.

This phenomenon goes far beyond Elon Musk and Tesla.

All the founders of Tech companies are seeing their fortunes explode at the moment. Founder of Amazon, Jeff Bezos is now at the head of a fortune that exceeds 180 billion dollars.
On July 20, 2020, alone, Jeff Bezos saw his fortune increase by 13 billion dollars. Never in history had such an increase in fortune been observed for a man.


This unprecedented increase in the wealth of the world’s richest personalities has several explanations, but they are all rooted in the economic crisis that the world is currently going through.

To combat the effects of this economic crisis, the Fed and other central banks have printed more than $10 trillion in fiat money since May 2020. All this money printed out of thin air has been injected into the financial markets as confirmed by the unprecedented explosion of Balance Sheets of the world’s major central banks.

This money poured into the monetary and financial system has allowed the stock market to recover dramatically since March 2020.

The Dow Jones is slowly but surely moving closer to its pre-crisis level, which was close to a record 30,000 points. As a reminder, the Dow Jones hit a four-year low on March 23, 2020, of around 18,600 points.

At the time of writing, the Dow Jones is very close to 27,000 points.

The stock market would almost give the impression that the economy has experienced a V-shaped recession. It is an illusion because all economic indicators are in the red right now.

The GDP of most G20 countries is expected to fall between 6 and 14% in 2020 according to the latest IMF estimates. Unemployment figures in the US are extremely bad. More and more companies are going bankrupt.

The economy is unable to find its pre-crisis level for the simple reason that the threat of a second wave of coronavirus is still looming all around the world. In the United States, the first wave has never been brought under control.

The daily numbers of detected cases and deaths from COVID-19 in the US are unfortunately breaking records.

All this is plunging the economy into total uncertainty for the coming months.

As U.S. Treasury bonds are no longer profitable, investors naturally turn to the stock market. Their goal is to obtain more profitability.

Retail investors prefer to buy the most highly valued stocks. They therefore massively buy shares of Tech companies.
This strong movement has led to the creation of a real Tech bubble on the stock market.
Tech companies such as Apple, Amazon, Microsoft, Google, Facebook, Tesla, Netflix, and eBay have seen their stock price explode since their lowest point in March 2020:

Apple: Increase of +74% | Market cap of $1,700 billion.

Microsoft: Increase of +56% | Market cap of $1,600 billion.

Amazon: Increase of +85% | Market cap of $1,550 billion.

Google: Increase of +50% | Market cap of $1,060 billion.

Facebook: Increase of +62% | Market cap of $683 billion.

Tesla: Increase of +340% | Market cap of $293 billion.

Netflix: Increase of +65% | Market cap of $216 billion.

eBay: Increase of +118% | Market cap of $40 billion.

All these Tech companies have been outperforming since the multi-year low hit in the mid of March 2020.

I have only mentioned a few of them here, but the situation is the same for all Tech companies today. The Nasdaq index has risen +55% since mid-March 2020.

Everything changed on March 23, 2020.

That’s when the Fed decided to conduct an unlimited quantitative easing program. This program resulted in the printing of $3 trillion out of thin air, and a Fed Balance Sheet that surpassed $7 trillion for the first time in its history.

The United States took advantage of this to increase its public debt as never before in such a short period. It now stands at over $26.5 trillion. The United States is not alone since most G20 countries now have a public debt-to-GDP ratio of over 100%.

All these actions have allowed the stock market to rebound incredibly, but have not allowed the real economy to rebound. The uncertainty is too great for that.

As long as a vaccine against coronavirus is not made available to as many people as possible, the economy will always be at risk of falling again.

Tesla is the symbol of the Tech bubble that formed

In the face of this uncertainty, investors are therefore blindly moving towards Tech stocks, as I am about to show you. The best symbol of this madness is the incredible increase in Tesla’s stock price of +520% in one year.

This increase does not in any way reflect Tesla’s intrinsic value.

Elon Musk himself admits that he finds his company’s stock far too expensive. That’s putting it mildly.

Many still refuse to open their eyes to see this truth that seems to bother them.
If you doubt it, I invite you to refer to the definition of a bubble given by the reference site Investopedia:

“A bubble is an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive sell-off occurs, causing the bubble to deflate.”

This corresponds perfectly to the situation we can observe on the stock market for Tech companies.

When investors will no longer be able to pay such high prices for the stocks of these companies, a massive sell-off will occur, causing this bubble to burst.

At that point, the stock market should reconnect with the real economy, which is heading towards a W-shaped recession.

Conclusion

While the Fed may say that it is ready to do even more to support the U.S. economy, retail investors will open their eyes sooner or later. For many, this situation is probably new, as there has been a 40% increase in the number of retail investors in the stock market since March 2020.

The coming sharp fall will teach them the hard lesson that the stock market cannot perform like this whereas the global economy is in as worst state as it was during the Great Depression in the 1930s.

The big question now is not whether the stock market will fall sharply in the coming months, but when.
*Culled from Medium of 23 July.