Dizzying valuations, IPO rage ticks on bubble checklist

Photographer: Michael Nagle / Bloomberg

The IPO market is manic. Stocks have not been that expensive since the dot-com era. The Nasdaq 100 doubled in two years and inflated its valuation, while volatility remained stubbornly high.

It’s a setup that will put investors on fat returns from 2020, a year that has challenged the easy statement. It is also one that warns a growing group of experts about a bubble.

Knowing when market marches change from logical to excessive is always difficult. That was almost impossible when 2020 ended, with interest rates almost zero and the federal government releasing another $ 900 billion into the economy. But history offers clues and a large amount of power market conditions meets criteria that are likely to be found on a bubble checklist.

Take a study by Harvard University researchers published in 2019. It noticed that while not every stock fluctuation is disastrous, those that do share features include increased issuance, greater volatility and a sector or index that is double and twice as high as the broader market. Check, check and almost check.

‘Are there parts of the market that are bubbling? Yes, clearly, ‘Peter Cecchini, founder of AlphaOmega Advisors LLC, said on Bloomberg’s “What Goes Up” podcast, adding that ‘many of them are, of course, speculative technology companies.’

Issuance of shares, initial public offerings and blank check companies became so popular that the record fell after the record in 2020. U.S. companies sold $ 368 billion in new shares last year, 54% more than the previous high, according to data compiled by Bloomberg.

IPOs Raised $ 180 billion, the most ever, as companies, including Snowflake Inc., Airbnb Inc., and DoorDash Inc., took advantage of the stock market boom. According to Bill Smith, CEO and co-founder of Renaissance Capital LLC, the first day’s share price among the newcomers was the largest in two decades.

“These are drawing signs,” says Robin Greenwood, a professor at Harvard Business School and co-author of the 2019 study. “The probability of a correction of the market today is much greater than in the historical average.”

A subclass of IPOs also started in 2020, contributing to concern. Special purpose acquisition vehicles, which use the proceeds of a share sale to acquire a private company, raised approximately $ 80 billion in 2020, more than was cut jointly in the previous decade. SPACs that made a purchase are up 100% for the year, according to research by George Pearkes, global macro strategist at Bespoke Investment Group.

“These are quite bubbling things,” he wrote in a recent comment, although he added that “more remarkable” is that SPACs that have not yet announced have gained about 20%. “It’s pretty speculative behavior, of course.”

Although some assets show worrying signs, the broader market may not start immediately. First, the Federal Reserve has promised to keep interest rates close to zero, which will make protracted stock valuations seems more reasonable compared to returns on bonds.

And Harvard researchers say that while the Nasdaq 100, while doubling its price on a historic lead in just two years, is still not excessively higher than the S&P 500 index compared to previous bubbles. The broader measure has increased by 50% since 2018 and is not enough to measure the technological meter to meet their criteria.

Bubble talks stifled for months, prompting many warnings from people like Greenlight Capital David Einhorn to Wolfe Research strategies.