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Is the US tech bubble going to burst again?

by John Saunders
16th Sep 20 11:11 am

Twenty years ago, the dotcom bubble officially burst, ending a period of sustained hype and investment in emerging technology stocks. This followed the global rise to prominence of the World Wide Web, which precipitated a rush to market and even pushed the Nasdaq to an all-time high of 5132.52 on March 10th, 2000.

However, a subsequent market crash wasn’t far away, as vulnerable tech stocks collapsed and investors endured huge losses. By October 2002, the market had lost more than 75% of its value, with only a select few stocks (including Amazon and eBay) maintaining their viability in the eyes of investors.

Of course, these stocks continue to underpin the stock market in 2020, while they’ve also experienced exponential growth during the coronavirus pandemic. But after a recent dip, could the US tech bubble burst once again in the near-term?

The new tech bubble – How stocks have soared during the pandemic

During the so-called dotcom era and the period between 1995 and 2000, the Nasdaq gained more than 400% in value. It also doubled roughly in size during the last six months of the rally, before the market plunged by 78% over the course of the following two years.

The recent boom has been a little more conservative, with the Nasdaq jumping 82% in the six months that followed its huge trough in March. However, some investors have seen returns on individual stocks of between 100% and 200% or better during this period, with assets such as Zoom Video Communications (NASDAQ:ZM) having soared from 107.86 in March to an impressive 325.10 by the end of August.

The S&P 500 which is similarly led by the tech sector, has also surged to all-time highs during the last two quarters.

This has undoubtedly been driven by Covid-19 and global lockdown measures, which have changed the behaviour of households, consumers and businesses alike. The rise of zoom has been largely inspired by the rise of remote working, for example, which is likely to continue for the near-term and drive higher demand for online meeting and communication tools.

The same principle can be applied to the rise of stocks such as Netflix and Amazon, as citizens across the globe have been compelled to spend more time at home and spend their cash online.

Beware the bubble – Is the tech market set to crash again?

While the extent of the recent tech market surge is less pronounced than during the dotcom bubble, the recent decline of stocks in the US has raised fears that a crash could be just around the corner.

The S&P 500 fell by 3% at the end of last week, for example, while the aforementioned Nasdaq Composite retreated by around 1.27% after regaining some previous losses at the start of September.

Declining demand for high-powered tech stocks definitely drove this trend, as investors seemed to sour on assets such as Netflix. This equity has certainly seen its profits plummet since the beginning of September, from a peak of 556.55 on the first of the month to just 476.26 on Monday 14th.

However, fears about a tech market collapse are largely unfounded, particularly as the recent dip can be explained by the fact that the recent sell-off will have been planned by profit-hungry investors.

After all, many individuals will have invested in tech stocks as they declined in value at the beginning of the global pandemic, with a view to cashing in once they’d reached a desired peak. Of course, this is different to how investors react when forex trading, as it’s far easier to buy and sell currency without assuming ownership of the underlying asset.

At the same time, today’s technology stocks are far more established than they were at the turn of the century, when the dotcom boom was driven by vulnerable and burgeoning brands that lacked the infrastructure to survive.

This represents a major and significant change, especially as dominant stocks like Amazon are also underpinned by high-growth markets such as ecommerce.

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