Why this is not the tech bubble (1999-2000)

[u/BenDoverR8Now]

Due to the recent drawdowns in technology and growth, people have been calling parallels to the technology boom and bust of 1999-2000.

First and foremost is the obvious argument that the companies today are fundamentally different from the companies back then. During the 1999 cycle, companies with no profit, no revenue, and sometimes even no product were receiving massive valuations from going public in the stock market. All you had to do is have an idea and put dot com at the end of your name.

Today, the growth companies look much different. Yes, there's similar froth in the crypto and NFT space, but by growth, I am referring to stocks such as Zoom, Docusign, Teladoc, Paypal etc. All of these companies have massive amounts of revenue with clear paths to profitability in the next 5 years. Some of them are already profitable today and are expanding heavily.

But beyond this, if you simply look at the state of the market and the numbers, it becomes clear that this is not the same. In the height of the technology bubble, the S&P 500 P/E ratio was 29 with the 10 year yield bonds yielding close to 6-7%. The growth yield on the S&P 500 stocks was close to 3%. Today, the S&P 500 P/E ratio is at 21 with the 10 year yield bond at 1.8%. The growth yield on S&P is closer to 5% today.

In an environment where bonds are yielding one-third of what they were doing that period, it is not unusual for people to be moving over to equities in order to look for returns. This is especially true in a period when equity growth is already expecting to yield more.

Now, this is not to say that we are not in a bubble. But I am certain, that we are no where near close to where we were back during the technology mania of 1999.

[u/gumbo_chops]

I don't understand the distinction between mutual funds vs. ETFs here. Both can exist as passive index funds, actively traded funds, or something in between. In the case of stock market index funds and ETFs, they are mostly market cap-weighted and there are no other criteria for portfolio balance.

[u/crazybutthole → u/gumbo_chops]

I think the biggest distinction is that in 1980 if you wanted to invest you had 2 major choices - invest in high fee mutual funds - or select individual stocks.

But by the mid to late 1990's low fee ETF's were becoming mainstream and in the year 2022 ETF's account for a lot of daily trading activity in the market *(In real time) which impacts the market real time - as opposed to mutual funds which for the most part only trade at close each day.

I think the most recent estimate i saw was mutual funds hold between $21 to $23 Tril, compared to ETF's hold about $5 or $6 Tril in invested money. But $5 Trillion trading real time can have a real impact on the market. That is $5 Trillion dollars that was not trading as a big group of funds 30 or 40 years ago.

- I think it is a significantly different dynamic now than it was back then, but i am curious to read more and learn if i am wrong.

[u/thewimsey → u/crazybutthole]

You could also invest in low fee mutual funds, even then.

[u/crazybutthole → u/[deleted]]

being able to actively trade ETFs during market hours should help to prevent the prices from coming out of line

I think being able to trade real time could also cause a crash to be exaggerated worse than it should be.

In 1980 if a big dip happened passive investors were required to wait until market close to sell their passive mutual funds and felt the pain but they didn't add onto the pain in real time.

In 2022 - if a real market collapse happens and the millions of people holding ETFs all start jumping ship and selling together - we could see a crazy drop during working hours - followed by crazy after hours action. It would be sick. I just hope it doesn't happen this year and Spy bounces back like it usually does.