What can derail this market? I mean what can make it so you have no choice, but to sell and sell hard?
Why shouldn't we ask that? Isn't the fear that it could all turn to a pillar of salt with us trapped in it, because we finally went all in to the hot stocks, especially during earnings?
I don't think this market falls over on its own accord, as was the case in the most analogous year, 2000. Then, we had a tremendous overbuild of the internet without the ability yet to harness the darned thing correctly. But you couldn't tell at the time.
We all laugh now at Pets.com or Infospace or CMGI and so many of the other blow ups from the dot-com period of wealth destruction, but let's remember that Pets.com could have been Chewy (CHWY) and Infospace or CMG could have been Alphabet (GOOG) , and Nortel or Lucent could have been Cisco (CSCO) . In fact, I can come up with analogies now for all the so-called failures then that make you realize that hindsight's 20-20 but foresight can, at the time, be 20-20, too.
But I am going to take the hateful 1999 analogy right on, because we have the clues to what could unravel this era, we just have to spot them. We did have two markets back then, the prosaic S&P 500 and the go-go Nasdaq. Only one was real. After that, I will detail what's different from 1999 that can still crush the momentum here.
First, are the leading companies profitable or are they saying it's better to lose money now to dominate later? This logic purveyed that era. I remember when I started TheStreet.com in 1995, the venture capitalists I met all said the same thing: The opportunity was too big for an online stock journal to care about losing money. That will keep you from being big down the road. Success was measured in eyeballs, not earnings, or sales.
That was the mantra for 300 companies that came public during that period of time. Three hundred. Only a handful survived the era.
Now, though, most of the winning companies are making fortunes. When you look at Apple (AAPL) , Facebook (FB) , Alphabet (GOOG) , Amazon (AMZN) and Microsoft (MSFT) , you see some the most immensely profitable companies of all time.
Not a single company in the Top 20 companies in the Nasdaq back then looked anything like these companies. Those companies back then were on the come, and never got there. These companies all go there and yet continue to innovate.
Second, some of the larger companies from that era turned out to either be ethically challenged or outright fraudulent with made up financials. I don't see anything like that right now. I know there have been issues with the accounting of Tesla (TSLA) . But nobody really questions those numbers any more. Maybe they should, but there are real cars being sold and if there were more cars, there would be more sales, not something that Ford (F) or General Motors (GM) could claim. I don't see any Worldcoms here, the classic case of fraudulent numbers. I can't find any of the companies now that could even be a Worldcom, too much scrutiny.
Three: After a very short period of time, the investors and executives of those companies back then were selling stock like mad. You would have secondaries pretty much every day of the week. The dumping was outright frightening.
When web growth sputtered, the largest companies back then knew that their days were numbered. If the execs couldn't sell the companies, they sold all their holdings. Sure, there have been some sales and some companies have been bought for a lot of capital and stock, but I defy you to show me big errors in their buys, errors, like Newscorp buying Myspace for, at that time, an astounding $585 million, only to sell it six years later for $35 million. When I think of the big acquisitions that big tech has made they are, first, few and far between and, two, pretty darned successful, like Facebook with Instagram or Microsoft with LinkedIn, or Google buying YouTube. The only questionable acquisition? Amazon's curious buy of Whole Foods. That said, the place is better than ever.
Fourth and final is that there was a ready coalition among analysts, investment bankers, fast money clients and venture capitalists to bring anything public. The deals came fast and furious, so fast that we had double the number of companies we have now and many simply weren't set up to survive unless everything went right, meaning that streaming video would ultimately look like analogue, that cellphones could be smartphones, not dumb bricks, and that every single topic needed its own vertical without aggregation.
The participants in this faux gold rush all made absurd profits on the backs of the individuals who financed it all, having been lured into the casino by instant riches and ending up with long- term poverty. The hucksters made out like bandits.
Again, we don't have anything like that. The cellphone ultimately got smart and spawned whole, successful industries. High speed internet saved the darned thing and made it mass. We didn't have a cloud to migrate to, everything was expensive and on premise. The verticals are all sewed up, no room at the inn. All of the big dogs these days harnessed every single aspects of the changes. There are no hucksters.
So, what do I think stands in the way of these big cap stocks from dominating?
One, if everything goes the way of the bulls, meaning more testing, more mask wearing and new stimulus with a pledge to keep it going until we get a vaccine, I think a lot of money will flow back into the three quarters of the S&P that's down for the years. Sure, we may have a need to build up more stay-at-home offices, but with a vaccine, we will be heading back to the office. We will be going out, traveling and the money from today's winners will be distributed to the current losers. It's pretty ineluctable that will occur, but it is not ineluctable that we will embrace masks, get more testing or have a working vaccine or vaccines.
Two: the government. Next week there are congressional hearings where the heads of Apple, Amazon, Google and Facebook will have to testify about market concentration and anti-competitive behavior. Meanwhile, Slack (WORK) is pursuing antitrust action against Microsoft (MSFT) . If governments shackle these companies, you will see some real declines as you won't be able to calculate the future gains of these companies.
Third is China. If we go into a full bore cold war with China, we will lose a lot of sales in China. The issue, of course, is the largest company, Apple. If the president presses too hard, then Apple's stock gets hammered and even as the rest of FAANG has little risk to China, they will get hurt, too. That's just the way the exchange-traded funds crumble.
Fourth, inflation. No one is going to pay a lot for growth in the out years, if we have raging inflation. The non-index owners of stocks know that inflation is the ultimate eroder of wealth.
Finally, let's consider what most Wall Streeters fear: higher taxes for capital gains. If you know that capital gains are, in the future, going to be taxed as ordinary income, something that is in the realm of the Democrats, then if Joe Biden wins the White House and the Democrats take the Senate, how can you not sell something to beat the change, unless, of course, they make it retroactive.
I do not think this market collapses on valuation, on fraud, on inflation -- it's non- existent -- or on its own weight with massive insider selling. I do think that it can be hurt by the government, whether it be through antitrust or taxes or cold war.
We can't say stocks never go down, so never sell them. We can say that the odds of taxes, cold war with China and antitrust are all very real.