With Wednesday's steep selloffs in retail tech favorites followed by by a Thursday during which Robinhood traders ran wild once again -- and yet another high-profile tech IPO soared to heights few considered imaginable a short while ago -- I'm definitely not going to try and predict just when the current mania ends.
But given the current mood, as well as how past bubbles have played out and what the macro environment might look like in 2021, I think there are three possibilities:
Possibility #1. Very Soon (Within the Next Few Weeks)
I think this is a possibility simply because this year's speculative frenzy in select tech stocks (think electric car makers, high-growth software firms and certain fast-growing consumer tech names) has hit such a fever pitch over the last couple of weeks, with numerous companies blasting off (often aided by short-squeezes) in ways that suggest buyers in favored names have little regard for things such as valuation, competition and/or how demand might look 12 months from now. More often than not, such parabolic run-ups signal at least a short-term top -- if not something bigger.
Perhaps the frenzy ends in January, after many financial pros get back to work after taking the holidays off. Or perhaps it ends sooner than that, as a critical mass of investors holding tech names that have been bid up to sky-high levels decide they've had enough, with some macro or political factors acting as triggers (for example, concerns about COVID's winter impact or how Georgia's Senate runoffs are trending). Either way, it's not too hard to imagine this brand of euphoria running out of oxygen fairly soon.
On the other hand, bubbles often (though not always) haven't burst until clear signs emerge of weakening business conditions for favored names -- signs that begin making investors question the runaway-growth narratives that help fuel a bubble. And it's not clear that we're going to see such signs emerge in the next few weeks in fields such as consumer tech or enterprise software.
Possibility #2. When Consumer Spending Begins Shifting
Though it already feels like ancient history, many richly-valued stay-at-home plays sold off hard a month ago thanks to Pfizer's (PFE) vaccine announcement. Given that there seems to be a lot of pent-up consumer demand right now for things such as travel, dining and live events, it's easy to see consumer spending shifting in a big way once COVID vaccines are widely available.
The case against the bubble fully ending at this point: Only some of the names that have been bid up to the moon are likely to see demand fall significantly when this shift happens. Sure, companies such as Peloton (PTON) , Wayfair (W) and DoorDash (DASH) are likely to be affected, but many enterprise software and cloud services names could see demand trends hold steady -- or perhaps even improve a bit thanks to higher demand from COVID-affected industries.
As a result, this spending shift could simply change the contours of the bubble, with investors rotating away from certain stay-at-home plays and towards reopening plays (and continuing to favor certain existing bubble names).
Possibility #3. When Inflation Picks Up
This is perhaps the bull case for those partaking in the current frenzy. Because -- in spite of the dramatic increase seen this year in the money supply -- it could take a little while for inflation to start impacting financial markets.
Right now, the U.S. personal savings rate is nearly twice what it was a year ago, as higher spending on various goods is more than offset by major declines in fields such as travel and dining. There's a good chance the savings rate drops considerably once vaccines are widely available.
And as this happens, inflation could begin rearing its head, as demand for things such as hotel rooms, cruises and restaurant reservations outstrips supply, particularly in industries that have seen a lot of businesses close this year. Moreover, banks are likely to up their lending to new and existing businesses that are trying to meet this pent-up demand, which could drive additional inflationary pressure.
All of this, in turn, could both drive bond yields higher (increasing the discount rate that needs to be applied when valuing companies) and motivate the Fed to take a more hawkish stance. That said, chances are that we won't see a scenario like this play out for at least a few months, and perhaps longer.
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Regardless of when and how this party ultimately ends, it probably won't be pretty for a broad swath of tech stocks -- not just the ones bid up to sky-high multiples, but also some of the ones that have risen to just moderately expensive levels. Investors staring at large paper profits that were racked up in recent months should consider taking some money off the table, or finding some ways to hedge against a downturn.
