Every cycle there is a " next great thing" and every time it ends with increased interest rates .
The market is forward looking and the smart money is betting that the BNPL story is over
The tech-heavy Nasdaq peaked on March 10, 2000, at 5,048.62, a level it would not reach again until March 2015. From that March 2000 peak, all the way down to the trough it reached on October 9, 2002 (the bear market bottom would be 1,114.11), the Nasdaq would lose nearly 80 percent of its value.
By April 2000, just one month after peaking, the Nasdaq had lost 34.2 percent of its value.
Was there any one thing that pricked the bubble? No, there were a myriad of factors. The Fed had finally begun to raise interest rates: three times in 1999 and then twice more in early 2000, the most sustained round of fiscal tightening over the whole of the late 1990s. Just as suddenly, Fed language shifted to an open attempt to rein in equity prices. Added to this was the fact that Wall Street analysts began advising their clients to lighten up on internet stocks, saying the technology sector was “no longer undervalued.” But more than anything else, it was the weak constitution of all those “iffy” dot-coms that had hit the market toward the tail end of 1999 that tipped the scales, companies without a realistic chance to make money over the long term.
By April 2000, just one month after peaking, the Nasdaq had lost 34.2 percent of its value. Over the next year and a half, the number of companies that saw the value of their stock drop by 80 percent or more was in the hundreds. And for most, no recovery ever came, even for the biggest names. Priceline cratered 94 percent.
There are various ways to measure the amount of wealth that was annihilated when the bubble burst. As early as November 2000, CNNFN.com pegged the losses at $1.7 trillion. But that would count only public companies. Beyond them, it’s estimated that 7,000 to 10,000 new online enterprises were launched in the late 1990s, and by mid-2003, around 4,800 of those had either been sold or gone under. Trillions of dollars in wealth vanished almost overnight.
Between September 1999 and July 2000, insiders at dot-com companies cashed out to the tune of $43 billion, twice the rate they’d sold at during 1997 and 1998.
So, who ended up holding the bag? Average investors. Over the course of the year 2000, as the stock market began its meltdown, individual investors continued to pour $260 billion into US equity funds. This was up from the $150 billion invested in the market in 1998 and $176 billion invested in 1999. Everyday people were the most aggressive investors in the dot-com bubble at the very moment the bubble was at its height — and at the moment the smart money was getting out. By 2002, 100 million individual investors had lost $5 trillion in the stock market. A Vanguard study showed that by the end of 2002, 70 percent of 401(k)s had lost at least one-fifth of their value; 45 percent had lost more than one-fifth.
Baby Boomers watched the insiders and the bankers, the lucky and the elite, walk away scot-free while they, the hardworking people who did what they were told, lost everything. This all happened to them again less than a decade later in the housing market. The bursting of the dot-com bubble was the opening act of our current economic era, and the repercussions from its aftermath are still with us today, economically, socially, and politically.Many observers of the dot-com bubble have compared it to earlier bubbles like tulipomania in 17th-century Holland or the collapse of the South Sea Company in 18th-century London. But it’s the example of the railroads in Britain in the 1840s that’s the most analogous. Railways were cutting-edge in the 1840s. As with the dot-coms, there was a period when Britons rushed to invest in schemes surrounding this new technology. Eight hundred miles of new railways were floated for development in 1844; 2,820 miles of new track were proposed in 1845; 3,350 miles authorized in 1846. Because Parliament had to pass legislation approving each scheme, the railway bills passed by Parliament provide an amusing analogy to the IPOs of the dot-com period. Forty-eight railway acts were passed by Parliament in 1844, and 120 in 1845. By 1847, investment in the railways represented 6.7 percent of all national income.
The railroad bust came because, in historian Christian Wolmar’s words, the bubble was ultimately based on “little more than optimism feeding on itself.” It was pricked in part by the Bank of England raising interest rates, and its aftermath feels similar to the aftermath of the dot-com asco, albeit with a Victorian tinge.
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