A Market Bubble: History Does Not Repeat Itself, But…

Market Bubble

“History does not repeat itself, but it does rhyme.”

Mark Twain penned this line in the 1884 book The Adventures of Huckleberry Finn. In the last few days, this saying returns to my mind more often.

I’ve been through many Bull markets and bubble events over my career. I remember the market’s surge starting from 1996. Then, I saw the dot-com bubble burst in 2000 at a small stock market service publishing house. It was a time of accelerated price gains and, for me at the time, unbelievable euphoria on the stock markets. That period was the gold-rush years for the Internet.

This time was the beginning of the Internet’s global campaign of conquest. The market’s favorite stocks were those of companies that had something to do with “online.”

You can remember the euphoria and recognize the names:

  • Network builders like Cisco Systems (NASDAQ:CSCO)
  • Providers like AOL
  • Computer manufacturers like Dell Computer (NYSE:DELL)
  • Operating system developers like Microsoft (NASDAQ:MSFT)
  • Digital auction houses like eBay (NASDAQ:EBAY)
  • Internet browser developers like Netscape

In Germany, the “Neuer Markt” developed in parallel to the technology segments such as Nasdaq. Here, the number of new issues took an exponential course. Those who could get hold of a few shares at the time of any tech IPO were guaranteed price gains. Demand for information about the Internet’s growth and the benefiting companies was high.

The publishing house I worked for knew how to exploit this for its own benefit. I realized in the Fall of 1999 that this euphoria had started to fade. I began to turn away from technology firms and turned to neglected standard stocks: According to my assessment, these were the stocks that the mass of investors would probably turn to when the dot-com bubble burst.

The following chart makes my view plausible at the time.

Market Bubble 94-00

Tech stocks of the Nasdaq 100 had far more to lose than the standard Dow Jones stocks.

Value Versus Growth

The following chart shows that my assessment proved to be largely correct:

Market Bubble 99-01

One can see the last phase at the peak, from January to March 2000. A lot of people unloaded standard stocks to free up capital. They then invested the liquidity into growth and technology stocks. When the relentless sell-off in the Nasdaq 100 began, the large standard or value stocks of the Dow Jones held up comparatively well.

Is History Repeating Itself?

Let us now compare what we have seen with the current development. The following chart again shows the two indices Nasdaq 100 and Dow Jones. This time from the crash low last year until today.

The outperformance of technology stocks over standard stocks has been significant for years. One can see this in the last phase, but only until mid-February 2021!

Since then, the Dow Jones has only consolidated, while the Nasdaq 100 has corrected.

Since the last record high in mid-April, value stocks have even gained, while tech stocks have lost ground.

What the End of a Market Bubble Looks Like

Finally, let’s look at how the story continued for the two indices from 2000 to 2003. Ultimately, standard and value stocks could not escape Wall Street’s downward pull. But, the Dow Jones “only” lost a third of its value. Meanwhile, technology shares of the Nasdaq 100 suffered a loss of -83%.

The Neuer Markt index played a decisive role in shaping the stock market in Germany in the second half of the 1990s. It has long since ceased to exist.

It became the TecDAX because the image of this market segment changed from euphoric to hatred. No wonder, with a loss in value of almost -97% between March 2000 and October 2002. For me, those years when the dot-com bubble first inflated and then burst were rich in stock market lessons.

Some of the many lessons learned were those that I hope I have been able to share with you today:

  1. In the financial markets, every euphoria has come to an end at some point.
  2. What rises high also falls low.
  3. Just because a segment has not risen as strongly before, it cannot be concluded that it will escape a correction or even make gains.
  4. The attentive observer will not miss the fact that a change is taking place.

History is not repeating itself, but it is rhyming. We will look to see if which way momentum moves. Will there be more euphoria, or will a similar pain hit growth stocks? I’ll continue to monitor the situation.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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