A Cautionary Tale From The Y2k Tech Bubble And How To Profit From It – History Worth Noting

 — No question we have a bubble here, but it is not the entire market–— multiple on the entire index appears to be all that many investors and market analysts see. This type of tunnel vision caused many to miss a great move in the broader market after the tech bust in 2000.— What happened to the rest of the market while the tech bubble was deflating? The Russell 2000 was a super star!— This is market history you need to know.The market is not a monolithPhoto by Zoltan TasiIf you really want to be granular, it is a market of stocks. Nonetheless, we are given daily warnings by the pros that the market is way overpriced (Y2K–S&P at 30 times forward earnings)… that we should be selling or at least not taking on new positions until the over valuation is worked out of the system. This is not unlike advice you might have heard back in 1996 …  “.” Of course, former Fed chair, Alan Greenspan would be right. He was just a few years early.I am not quite sure where we are in the inflation of the current bubble, but similar forces are at work as more money is funneled into a small group of stocks … thought to be invulnerable to the economic cycle, promising decades of above average growth. Currently these 7 stocks have an aggregate , almost 31% of the S&P 500’s $42 trillion total market cap.I’m not sure when this will end but I am sure it will. My advice: do not put new money into the ‘Mag 7’ funnel and maybe take a little off the table if you are long and feeling 10 feet tall and invincible.

Bubble 2000 versus bubble 2024
The ‘tech bubble’ ended in March of 2000 with the S&P 500 peaking at 1552.87. It would not definitively break out above that old all-time high until 2013. At its peak in March 2000 the foreword PE on the S&P 500 was about 30. That compares to 20.5 times today. Seven stocks are responsible for the current 20+ multiple. Without the Mag 7 today’s multiple would be closer to 15. Ironically the yield on the 10-year US Treasury note back 2000 was just a bit over 6% vs. 4.18% today.At its peak in  () was the most valuable stock in the world. Its market capitalization hit $549 billion (today it stands at $204 billion), inspiring speculation by some that it could be on the way to becoming the world’s first trillion dollar company. The company designs and sells hardware and systems that power telecommunication networks and, of course, the then young internet. At its peak in 2000 the stock traded at  At its low, just two years later, it trade at $13. Friday (2/9/2024) it closed at $50.43. Its current trailing 12 month PE is 15.13. For the fiscal year ending July 2000 analysts were projecting earnings on a post split basis of about $.50 share. Cisco was trading at 158 times estimated earnings. It was a tree growing its way to the sky. It was the future of everything … kinda like artificial intelligence.Cisco, as a profitable company, was the exception in 2000’s bubble. It was profitable and had already been in business, successfully selling to the telecom industry for years. The real thrust in the market came from the legions of companies that had come public to capitalize on the brave new world of the World Wide Web.In February 2000 an obscure division of , the Omaha based, privately held engineering and construction company was a market favorite. It was their unprofitable telecom subsidiary,  Their goal was to become the dominant low cost vendor, nationally and internationally, of high speed, fiber-optic internet service …  the information super highway. Level 3 came to play with a 16,000 mile inter-city network as well as well as international networking assets. At its peak on March 10, 2000, the stock traded at a split-adjusted price of $1952.82 per share … market cap. $44+ billion dollars. Today as part of what is known as  (LUMN–$1.52) the market cap is $1.534 billion. The market in 2000 was full of speculative plays on the potential rapid growth of the internet, again like AI. But today, unlike the internet bubble, the fever seems more concentrated and limited to fewer names.Also, the public was super engaged. I was seeing people who had sworn off stocks after the 1987 break in the market eagerly wanting to play this wave of the future. On the Nightly Business Report the reporters would routinely question investors coming out of their local brokerage office about the fact that the market had gone up so much, so fast, ‘were they worried’? Routinely the response was, ‘Nah, I’m in it for the long run. Where else can you get 8, 9, 10% on your money?’ Mind you, they could have gotten 6% on a 10-year TSY.Everybody was in and euphoric … no one left to buy. The bubble burst and the Nasdaq composite, after making a then all-time high of 5132 (March 2000), lost 60% of its value, closing at 2110.49(April 2001). It would eventually hit a low of 1108.49 October 10,2002. The Nasdaq Composite did not recover and break through its previous all-time high until 2015.  Because of the extreme over-valuation the tech and telecom industries attained it took 13 years for the S&P 500 to make new all-time high. March 2000was the ultimate top of a secular bull market in the S&P that had begun in the early 1980s. Everybody was in. Everybody loved stocks. There was no fear. The secular bear market that was to follow culminated in a in March of 2009 with S&P 500 bottoming at 666, down 52% from its March 2000 high. The top of the current bull, when it comes, and subsequent decline from current records should not be as severe because we have not gotten to the euphoria that we saw in 2000. Yes, I believe there is euphoria in the very narrow funnel of stocks considered safe in all economic environments ,,, Mag Seven, et.al. For the rest of the market things are kind of meh.

Who were the winners when tech blew up?
The winners came from all the places that the market totally ignored during the internet boom … mid-cap, value and small cap. For example It peaked at 842.06 September 30, 2007 … up 56%. The S&P 500 experienced extreme volatility during the period and ended up flat near its old high. The tech heavy Nasdaq  Composite fared much worse at 2701, down 47% from March 2000.I think that the message here, based on past experience, is pretty clear. You don’t want to be as heavily invested (or investing) in the mag 7 funnel because when the worm turns it could be pretty painful. You do need to get money to work in the unloved parts of the market as that is where the opportunity lies. Though history may not repeat itself exactly, it does tend to rhyme.Ignore this history at your peril. What’s your take?More By This Author:No Rate Cut … No Big Deal!The Huge 2-Month Jump In Confidence–Why Now? Be Wary of Not Letting ‘Good News” Be ‘Good News’