Sounds like a Dot-Com Crash?

Large-cap technology shares have been online trading on the defensive since the Federal Reserve announced it would initiate the tapering of its bond purchase program. Since hitting a high in November of 2021, the Nasdaq 100 has declined more than 9% slightly, nearly putting the index in correction territory. The decline has been relatively tame compared to the bubble, which burst in the early 2000s. The ensuing crash saw the Nasdaq 100 drop 80%. This period was the beginning of the internet, and stocks like, which had a business model of little more than a puppet and a commercial, saw exceptional stock price gains. The similarities between the current period and early 2000s are that the Fed discussed and then began to raise short-term interest rates, leading to an online trading stock market crash.

The Similarities and Differences between Today and the Beginning of the Millennium

There are several similarities between the bubble that crashed the stock market in 1999/2000 and today. While the Federal Reserve plans to raise interest rates, their intent is different. Several companies with business plans yet to show success have seen their stock prices accelerate to unrealistic levels. For example, Airbnb saw its stock price gap higher and nearly double on the first day of trading and surge even higher, only to fall back to levels that the company experienced in the first few days of trading. This type of price action was similar to what was occurring in 1999. The results of the irrational exuberance led to wealth increases beyond what the markets could sustain in 1999/2000.

Meme Stocks Show Similar Price Action

The movements of meme stocks reflect the problems that many retail investors experienced. In 1999, many inexperienced traders piled into the markets at ultra-high levels. The run-up and subsequent demise of stocks like AMC reflect speculative stocks’ rise and crash. At the beginning of 2021, AMC Entertainment holdings was a $2 share stock price. The social media platform Reddit/WallStreetBets rallied the troops to push out the hedge funds that were shorting the stock, which subsequently pushed it to $2. After their efforts, the social media platform helped push the stock price to $75 per share by mid-2021. The company’s fundamentals, including its earnings and revenues, did not justify these levels, especially while the pandemic was still in its first year. While some people were returning to movie theaters, attendance was nothing like pre-pandemic levels. Since hitting a high in mid-2021, AMC has returned to earn, dropping to $19 per share. The movement of AMC and GME was very similar to the online trading activity experienced by companies like in 1999/2000.

How Does the Fed Play a Role

The decision by the Federal Reserve in 2000 to raise rates was predicated on strong job growth accelerating equity and home prices. The consumer price index, a basket of goods and services, was not accelerating at unsustainable rates in 2000. Today, the consumer price index for December was up 7% year over year, the highest in 50 years. The elevated levels of consumer price and fear of continued accelerating inflation had spurred several announcements by the Federal Reserve. First, they announced in November that they would reduce bond purchases. Subsequently, in its December meeting, the Fed said they would allow their balance sheet to start to roll off. Federal Reserve governors also changed their forecasts, showing that they were willing to raise interest rates in 2022 several times, catching up to the projected market participants.

Why Did Inflation Accelerate?

There are specific reasons why the Fed changed its view and now appears to be willing to act swiftly to alter the course of inflation. The pandemic created a huge supply chain disruption globally, which has increased transaction costs globally. The initial lockdowns reduced demand and supply, but when vaccines became available, demand rebounded swiftly, however supply could not keep up. This scenario has created a bottleneck that has generated price increases for goods and services worldwide. Additionally, the Fed and governments around the globe created monetary stimulus to help increase spending. The outlays made an acceleration of capital which, by nature, increases prices. As money changes hands at an accelerating rate, inflation occurs. Now the Fed wants to pull back the reins, as they believe that they have brought the United States out of a recession created by the pandemic. These moves have quickly impacted the online trading of several stocks.

The Bottom Line

While the current market situation is not the same as the crash, there are many similarities. The Fed is beginning the process of tightening monetary policy. Companies have seen huge increases in their stock price and have now come back to earth. Inflation is not the same, but some irrational exuberance has made its way into the equity markets in meme stocks. It is these stocks that could continue to face a downward slide if the Fed accelerates its monetary policy tightening.