- Thirteen of the world’s biggest companies by stock market capitalization are technology stocks, and space or AI related, in some way shape or form
- Their aggregate stock market valuation is $32.8 trillion, broadly on par with the GDP of the USA
- The combination of stunning share price performance, some lofty valuations and new-era thinking feels reminiscent of prior stock market booms (and subsequent busts)
- No-one knows when sentiment may turn, but a study of prior stock market cycles may help
“The writer, thinker and ready adopter of innovative technologies Douglas Adams once wrote how one classic reaction to innovation is the view that, ‘Anything invented after you’re thirty-five is against the natural order of things,’” says AJ Bell investment director Russ Mould.
“Anyone who remembers the stock market technology, media and telecoms (TMT) boom and bust of the late 1990s and early 2000s may be feeling the same way about the current surge in the share prices of anything related to artificial intelligence and space, but the hard bit for them is that such views currently look positively old-fashioned.
“The tussle between bulls and bears is likely to continue, and one useful guide as to who may be proven right, and when, could be, Charles P. Kindleberger’s magisterial study of financial bubbles in his book Manias, Panics & Crashes.
“This study establishes a fairly typical sequence of events that can be seen through the history of previous market crazes, ranging from the South Sea Bubble of 1720 through to British canals (1790s), Latin American mines (1820s), US equities (1920s), Japanese equities and property (1980s) and global technology stocks (1990s), to name but a few.
“The details may change from cycle to cycle, or bubble to bubble, but human behaviour does not, and the running order is consistent, perhaps because, as the nineteenth-century banker and peer Lord Overstone once asserted, ‘No warning on earth can save people determined to grow suddenly rich.’
What are the typical signs of a stock market bubble?
“The starting point for a bubble is a new investment opportunity, one that may be genuine or even one with just a big enough grain of truth to be irresistible to those looking for a quick profit. It could be anything from railways to the internet to cryptocurrencies and the more disruptive or revolutionary it seems, the better.
“Initial security price increases catch the attention of newcomers, as ‘fear of missing out’ (FOMO) starts to gather.
“Investing (and possibly corporate) profits go into orbit. Fresh cash looks to get involved, often in the form of borrowings, either by investors in the form of margin, or by companies as debt.
“More copy-cats and imitators spring up, and more credit is made available as asset prices keep running and the profits keep flowing.
“Then the trouble starts. Insiders start to lock in their profits by selling to the unwary at elevated prices and leaving investors holding the bag. Prices initially correct but then rally as loyal supporters ‘buy on the dips.’
“Initial signs of distress then start to sow real seeds of doubt. A new offering goes wrong, or a firm runs out of cash, or a deal goes sour and asset prices fail to reach their previous peaks. The queue of copy-cat flotations and management teams looking to sell their stock on a secondary basis gets longer by the minute and supply of paper finally begins to outstrip demand.
“Then comes a good, old-fashioned scandal. Someone goes bankrupt or the accounts prove to be crooked, or someone runs off with the money and investors then realise that they have been had.
“Fear replaces greed. Asset prices collapse as investors scramble to cut their losses and the recriminations begin, as scapegoats are sought and publicly pilloried.
“Investors will have to judge for themselves where they feel we stand in this cycle, assuming they accept the view that some narratives and equity sectors may be entering bubble territory in the first place.
“Meme stocks, cryptocurrencies, non-fungible tokens and precious metals have all attracted hot money flows this decade in what can be seen as a series of mini-rolling bubbles, but subsequent corrections have not done lasting damage to the prevailing bullish sentiment.
“Perhaps the big test for space and artificial intelligence stocks is still to come, at least if one successful initial public offering (IPO) spawns a list of follow-on deals, and also comes with substantial secondary offerings of its own.”
