What the 2000 Tech Bubble Tells Us About the Stock Market Today
Recent losses for tech stocks have coincided with gains for utilities, healthcare, and consumer staples, an echo of the 2000 dotcom bubble, according to a recent Deutsche Bank note. Uncertainty about the U.S. election and monetary policy could continue to weigh on tech stocks in the coming months, according to one analyst. Even with the bursting of the dotcom bubble, investments in tech have significantly outperformed the broader market over the long-term.
There’s reason to believe history is repeating itself, according to a recent Deutsche Bank note that draws parallels between the current rotation out of tech mega-caps and the bursting of the tech bubble in 2000.
In the 9 months after the bubble reached its peak in March 2000, tech stocks fell more than 50%. The Consumer Staples, Utilities, and Healthcare sectors, meanwhile, each rose by more than 35%.
Research analyst Jim Reid sees similarities between that moment and the current sector rotation out of big tech stocks. The Magnificent Seven shed about 12% of their value between July 10 and Thursday, though they’re recovering some of those losses in today’s session. The S&P 500 lost nearly 4% in the same period. However, 7 of 10 sectors within the index rose over the period, led by utilities and healthcare, much like in 2000.
“The conclusion is that if tech continues to correct, we should see decent up moves in other sectors, especially as the size of tech dwarfs other sectors,” wrote Reid. “So even a small rotation out of tech could mean a big rotation into other sectors.”
Uncertainty a Near-Term Overhang on Tech
The recent pullback in high-flying tech stocks naturally prompts the question: should you buy the dip? The answer depends on your timeline.
“Our view is tech probably remains choppy here, at least through the election,” says CFRA tech analyst Angelo Zino. Given the uncertainties generated by the impending election and expectations for rate cuts later this year, he added, “We would say [tech] stays more range-bound and out of favor on a relative basis.”
Here the dotcom bubble offers another lesson. Tech and telecommunications stocks continued to fall after 2000 and lost about 85% and 75% of their value, respectively, by the end of the post-bubble bear market in late 2002. An investment in the tech-heavy Nasdaq Composite at the start of 2001 would have trailed the S&P 500 until 2009. But tech has handily outperformed since then, and that Nasdaq investment would now be more than 200 percentage points ahead of the same investment in the S&P 500.
Zino sees potential for the current sector rotation to continue. But, he says, “If you’re a long-term investor, this pullback we think is actually a pretty good opportunity.”
In conclusion, recent market movements in the tech sector have drawn comparisons to the 2000 dotcom bubble. The rotation out of tech mega-caps and into sectors like utilities, healthcare, and consumer staples mirrors the trends seen during the bursting of the tech bubble. Uncertainty surrounding the U.S. election and monetary policy is expected to continue weighing on tech stocks in the coming months. However, it’s important to note that even with the bursting of the dotcom bubble, investments in tech have significantly outperformed the broader market over the long-term. Investors should consider their timeline and risk tolerance when deciding whether to buy the dip in tech stocks. While short-term volatility may persist, long-term investors may find this pullback to be a good opportunity. As history has shown, tech has the potential to rebound and outperform other sectors in the future.
