Is the 2023 market Dot Com Bubble 2.0?
Earlier this week, a report from a team of quantitative strategists at JP Morgan (JPM) made the rounds on Wall Street. In the report, the analysts warned that investors should be aware of “persistently rising concentration” in the U.S. stock market in 2024. Lead analyst Khurum Chaudhry warned, “When viewed in a historical context, parallels to the ‘Dotocom Bubble’ era are often dismissed due to the ‘irrational exuberance’ that characterized this period. In this note, we demonstrate that there are a plethora of similarities between these two periods.”
While I agree with the report in the sense that investors want to see broad market participation rather than over-concentration in the market, it is too early to become fearful. Below are three reasons why:
Ratio Counterbalance Doesn’t Mean Tech Stocks Need to Have a Bear Market
A lopsided market can come into balance without the mega-cap “Magnificent 7” stocks like Nvidia (NVDA), Microsoft (MSFT), and Alphabet (GOOGL) falling hard. For example, small caps and lagging parts of the market may outperform, bringing equities markets back into equilibrium. In fact, this is exactly what I expect to occur – the Russell 2000 Index ETF (IWM) is coming off its longest drawdown off 52-week highs in its history so it may be due to outperform. Furthermore, the NYSE Net New Highs Indicator illustrates that participation is broadening.
Strength Begets Strength
Unlike the Dotcom Bubble, stocks are just clawing their way back to all-time highs. Bubbles typically occur when markets have rallied for years and are far extended from all-time highs. Furthermore, Ryan Detrick of Carson Research points out, “The S&P 500 gained 19.6% in 3 months. When >17%, (the S&P) is higher 6 months later 84% of the time and a year later gains 16.2% (median), and is higher 80% of the time. The bull move the past 3 months isn’t consistent with the end of a bull market or a bear rally. This is more likely the start of a new bull.”
Fed Rhetoric Tell? Cuts May Be on the Horizon
Yesterday, action in the Regional Banking ETF (KRE) was reminiscent of the March 2023 regional banking crisis. Regional banks suffered their worst day since last May after New York Community Bank (NYCB), which acquired the collapsed Signature Bank, plunged 40% after earnings and was forced to cut their dividend by 70% to meet regulatory demands. Meanwhile, the Bank Term Funding Program (BTFP), which was put into place to stabilize banks, is set to end next month. Despite the Fed’s “Hawkish” rhetoric, a slight change in the Fed’s statement may signal that the Fed may be forced to cut rates sooner than anticipated. In yesterday’s FOMC statement, the Fed removed a statement saying, “The U.S. banking system is sound and resilient.”
Bottom Line
In a recent report, JP Morgan’s quantitative strategists highlighted a “persistently rising concentration” in the U.S. stock market, drawing parallels to the Dotcom Bubble era. While the concern is valid, there are three significant reasons to be optimistic.
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Is the 2023 market Dot Com Bubble 2.0?
Earlier this week, a report from a team of quantitative strategists at JP Morgan (JPM) made the rounds on Wall Street. In the report, the analysts warned that investors should be aware of “persistently rising concentration” in the U.S. stock market in 2024. Lead analyst Khurum Chaudhry warned, “When viewed in a historical context, parallels to the ‘Dotocom Bubble’ era are often dismissed due to the ‘irrational exuberance’ that characterized this period. In this note, we demonstrate that there are a plethora of similarities between these two periods.”
While I agree with the report in the sense that investors want to see broad market participation rather than over-concentration in the market, it is too early to become fearful. Below are three reasons why:
Ratio Counterbalance Doesn’t Mean Tech Stocks Need to Have a Bear Market
A lopsided market can come into balance without the mega-cap “Magnificent 7” stocks like Nvidia (NVDA), Microsoft (MSFT), and Alphabet (GOOGL) falling hard. For example, small caps and lagging parts of the market may outperform, bringing equities markets back into equilibrium. In fact, this is exactly what I expect to occur – the Russell 2000 Index ETF (IWM) is coming off its longest drawdown off 52-week highs in its history so it may be due to outperform. Furthermore, the NYSE Net New Highs Indicator illustrates that participation is broadening.
Strength Begets Strength
Unlike the Dotcom Bubble, stocks are just clawing their way back to all-time highs. Bubbles typically occur when markets have rallied for years and are far extended from all-time highs. Furthermore, Ryan Detrick of Carson Research points out, “The S&P 500 gained 19.6% in 3 months. When >17%, (the S&P) is higher 6 months later 84% of the time and a year later gains 16.2% (median), and is higher 80% of the time. The bull move the past 3 months isn’t consistent with the end of a bull market or a bear rally. This is more likely the start of a new bull.”
Fed Rhetoric Tell? Cuts May Be on the Horizon
Yesterday, action in the Regional Banking ETF (KRE) was reminiscent of the March 2023 regional banking crisis. Regional banks suffered their worst day since last May after New York Community Bank (NYCB), which acquired the collapsed Signature Bank, plunged 40% after earnings and was forced to cut their dividend by 70% to meet regulatory demands. Meanwhile, the Bank Term Funding Program (BTFP), which was put into place to stabilize banks, is set to end next month. Despite the Fed’s “Hawkish” rhetoric, a slight change in the Fed’s statement may signal that the Fed may be forced to cut rates sooner than anticipated. In yesterday’s FOMC statement, the Fed removed a statement saying, “The U.S. banking system is sound and resilient.”
Bottom Line
In a recent report, JP Morgan’s quantitative strategists highlighted a “persistently rising concentration” in the U.S. stock market, drawing parallels to the Dotcom Bubble era. While the concern is valid, there are three significant reasons to be optimistic.
Zacks Reveals ChatGPT "Sleeper" Stock
One little-known company is at the heart of an especially brilliant Artificial Intelligence sector. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion.
As a service to readers, Zacks is providing a bonus report that names and explains this explosive growth stock and 4 other "must buys." Plus more.
Download Free ChatGPT Stock Report Right Now >>
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