Unpleasant parallels: the stock market crash is reminiscent of the dot-com crash

Ugly parallels
Stock market crash reminiscent of dot-com crash

By Jan Ganger

Is the hype over? On the stock exchanges, technology titles in particular are being hit hard. One thing is certain: Next week will be exciting.

That looks bad. The stock markets are in a steep decline, led by technology stocks. In numbers, the leading tech index, the Nasdaq 100, lost 7.5 percent this week, falling to its lowest level since early October. Since the beginning of the year there has been a minus of almost twelve percent. The index is on course for its worst monthly record since the 2008 financial crisis.

No wonder unpleasant memories flood up. That’s not because the Nasdaq 100 posted its worst week since March 2020, when markets plummeted due to the outbreak of the coronavirus pandemic. Shortly thereafter, things went steeply uphill again. More worryingly, the index lost more than 1 percent each trading day. According to Bloomberg, this has only happened twice in recent years: First, in March 2000, when the dot-com bubble burst. And then in view of the terrorist attacks in September 2001. According to the financial portal, the index then plummeted by almost 28 percent before it bottomed out almost a year later.

To put this in perspective: last year the Nasdaq 100 gained around 26 percent, compared to almost 48 percent the year before. In 2019 it went up by almost 38 percent.

It is striking that the current sell-off is not limited to individual titles, but has spread to the entire market like a wildfire. Traders also see the fact that even interim bargain hunters cannot keep the indices in the black as an alarm signal. It looks like many investors are taking advantage of any price gains to sell stocks.

Interest rates in focus

The impending turnaround in interest rates in the USA is considered to have triggered the crash. In view of the high inflation, the US Federal Reserve has signaled a series of rate hikes. The market is currently assuming that things will start in March.

That has consequences. Higher interest rates mean that stocks become less attractive compared to other investments. And tech stocks in particular are particularly sensitive to rising interest rates, as they finance their lavish investments with a high level of leverage. In addition, tighter monetary policy dries up liquidity in the market.

And there is another reason: the corona pandemic seems to be drawing to a close. The effects can be seen, for example, on Netflix. After the quarterly figures were presented, more than 20 percent went down. Netflix only expects to add 2.5 million subscribers from January through March, which is less than half of what analysts were predicting. “The winners of the pandemic are under pressure, and it’s likely to remain so. If everyone already has Netflix, it’s difficult to improve subscriber growth,” said investment strategist John Lynch of wealth manager Comerica Wealth Management. “Perhaps investors’ expectations were a little overblown.”

Other stocks in the entertainment industry had to lose feathers. Walt Disney titles fell almost 7 percent on Friday alone, ViacomCBS and Roku around three percent each. Stay-at-home stocks are suffering across the industry. For example, Delivery Hero was down 5.5 percent and Hellofresh was down 3 percent.

Heavyweights present numbers

And how does it continue? “The inflation and interest rate concerns are not going away anytime soon,” warned Craig Erlam, market analyst at brokerage firm Oanda. Should the Fed signal a rate hike of more than a quarter of a percentage point for March, further price losses on the stock market must be expected. The Fed leadership will announce the results of their deliberations on Wednesday. Although an immediate interest rate hike is ruled out, experts firmly believe that the central bankers will lay the foundation for such a step in the spring.

Quarterly figures should also provide impetus. Microsoft, Apple and Tesla, among others, will present figures in the new week. Then it may become clear whether the stock market crash is the expression of a healthy correction or whether investors are likely to face more horror weeks.

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