Markets
The Global Economy in Pictures: April 2016
The global economy has regained some composure, according to asset management firm Schroders.
In their view, markets have regained a risk appetite following action by central banks, the normalization of commodity prices, and a lack of materialization for tail risks such as a U.S. recession or a Chinese hard-landing:
While volatility is indeed near its YTD low with the benchmark VIX down 32% since the start of the year, we would point out that this is potentially some calm before the storm.
Here are some upcoming waves, and we’ll see how they break:
Earnings and Buybacks: The blended earnings decline for the S&P 500 so far in 2016 Q1 is -8.9%, according to Factset. When earnings season is done and if this stays on target, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. That said, companies are doing whatever they can to stifle these declines via share buybacks. S&P Dow Jones says that nearly one-third of S&P 500 companies have cut their share counts by at least 4% in Q1 of 2016.
Will investors continue to be “impressed” by this financial engineering, or will the reality of declining earnings finally hit?
U.S. Recession Watch: The Atlanta Fed’s GDPNow model forecasts U.S. growth at just 0.4%.
Brexit: While the margin has widened on the Brexit vote in favor of the “remain” camp, one in five have still not decided how they are voting. This means Brexit is still in play, especially if there is any voter complacency as the referendum draws closer. A “leave” decision could have significant impact: Britain makes up 15% of the EU GDP, 17% of EU domestic demand, and 13% of EU population. This previous post shows why Brexit could be a losing proposition for everyone.
Debt: The amount of debt is also hitting center stage. In the U.S. auto loans and student debt are two separate $1 trillion debt markets. Credit cards is getting there as well, and 62% of Americans now live paycheck to paycheck. Sovereign debt will close in on $20 trillion by the end of Obama’s tenure.
Things in China don’t look so good, either. Experts are warning that the country’s 237% debt-to-GDP, the highest in emerging markets, could lead to a American-style financial crisis or Japan-style malaise.
Markets
3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble
Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?
3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble
Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.
Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.
In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.
Comparing the Dot-Com Bubble to Today
In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.
The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.
1. Valuations Are Lower
Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.
| Date | Forward P/E Ratio |
|---|---|
| March 2000 | 60.1x |
| November 2023 | 26.4x |
Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.
2. Investors Are More Hesitant
During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.
| Year | Combined ETF and Mutual Fund Flows to Equity Funds |
|---|---|
| 1997 | $231B |
| 1998 | $163B |
| 1999 | $200B |
| 2000 | $352B |
| 2001 | $63B |
| 2002 | $14B |
Source: Investment Company Institute
In contrast, equity fund flows have been negative in 2022 and 2023.
| Year | Combined ETF and Mutual Fund Flows to Equity Funds |
|---|---|
| 2021 | $295B |
| 2022 | -$54B |
| 2023* | -$137B |
Source: Investment Company Institute
*2023 data is from January to September.
Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.
3. Companies Are More Established
Leading up to the internet bubble, the number of technology IPOs increased substantially.
| Year | Number of Technology IPOs | Median Age |
|---|---|---|
| 1997 | 174 | 8 |
| 1998 | 113 | 7 |
| 1999 | 370 | 4 |
| 2000 | 261 | 5 |
| 2001 | 24 | 9 |
| 2002 | 20 | 9 |
Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.
In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.
| Year | Number of Technology IPOs | Median Age |
|---|---|---|
| 2020 | 48 | 12 |
| 2021 | 126 | 12 |
| 2022 | 6 | 15 |
Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.
Navigating Modern Tech Amid Dot-Com Bubble Worries
Valuations, equity flows, and the shortage of tech IPOs all suggest that AI isn’t shaping up to be the next dot-com bubble.
However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.
Explore more insights from New York Life Investments.
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