The Nasdaq 100 index ended the previous trading day lower. In sharp contrast to the Dow Jones or Russel, the tech index, as Nasdaq 100 is also known, declined. The move lower is attributed to the news that the Democratic party won the run-off in Georgia, and that gave them two seats in the Senate – enough to have a majority there too.
One of the things the Democrats promised to do while in power is to deliver a corporation tax rate hike and to strengthen the regulation in the tech sector. Naturally, none of the two measures are bullish for the tech sector, so the index declined.
The big question at this point is if yesterday’s move lower is the start of a bearish market? While it is too soon to know that it is worth looking at the previous tech bubble in the early 2000s and see if similarities exist.
Lessons from the Last Tech Bubble
2020 brought new all-time highs for the tech sector. Unsurprisingly, as the world changed, and so did consumer behavior. Online shopping reached new extremes, and suddenly everything went digital.
So strong was the tech sector’s performance that investors began bidding for prices that did not make sense. Sky-high valuation brought the immediate question – is there a bubble in the tech sector?
Just like in the previous tech crisis in the late 90s early 2000s, everybody calls for a bubble. Economics 101 principles tell us that there is a bubble, and yet it is not bursting. In other words, it is easy to spot a bubble, but difficult to act, to make a profit from it – shorting the tech sector during the pandemic would yield only losses.
If we look back at the previous tech crisis, nobody knew that the bubble burst until months after it did so. In other words, while fundamental analysis of a sector or company does matter, the market may still beg to differ for a while.
The trick to identify and act on a bubble or an overvalued company is to match fundamentals with price. Just like trading any other market, timing is hard, as the market may remain irrational more than an investor can stay solvent. Also, shorting the market bears unlimited risks when compared to being long.
Will we find out months from now that the tech sector bubble ended?