Commentary on Political Economy

Sunday 29 November 2020


Beware the Dow 30K Euphoria

The market always dives en route to long-term rises. And tech stocks look wobbly.

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A great Wall Street lesson: Keep those decamillennial hats around. Last Tuesday saw the Dow Jones Industrial Average close above 30000 for the first time, but by Friday it was underwater again. Remember, more than 10 years passed between March 1999, when the market first crossed 10000 (with wild celebration), and November 2009, when it finally crossed that mark for good (hopefully). Even more time passed between when the market briefly crossed 1000 in 1966 and when it passed that mark permanently late in 1982.

It’s just a number, right? Yes, but blared across tickers, radio, TV, the web and now Twitter, market milestones symbolize progress. Or is it excess? Either way, they’re thought of as a scorecard of success. Oh what a feeling. In many ways, today’s market feels like 1999. Lower-than-expected inflation—check. Relative peace—check. Fed printing money—check. Plus new technological paradigms and IPO mania. Will it end the same way?

It’s easy to see why the market is booming. First, indexes overweigh successful companies (remember when General Electric got tossed from the Dow?). Thirty Dow companies and a cap-weighted S&P 500 mean trillion-dollar-valued companies drive the indexes. A quarter of the Dow’s past 10,000 points were provided by Apple alone.

Then add low interest rates—effectively zero, because there is a glut of capital and low demand for it. The Federal Reserve seems on course to keep rates low forever. The main reason is that we are in the midst of a serious digital dividend. Cloud computing, artificial intelligence and smartphone apps have driven huge productivity gains, in part by reducing each company’s need to build out its own infrastructure. Plus, work from home will mean fewer office buildings, less maintenance on roads and bridges, and less inventory in stores. Each Zoom call equals one less airline seat.


The market is paying for the digital dividend twice (or more). It pays for the profit upside of Apple, Amazon, Microsoft, Google and Facebook, but then again with high earnings multiples induced by low inflation. With interest rates near zero, the market pays up huge for future earnings. But not forever: For those keeping track, long-dated bond yields bottomed on Aug. 4.

But who cares? Wall Street loves a bull market. We’ve got IPO mania and SPAC attacks. If you can’t pull off an initial public offering, you can merge with a special-purpose acquisition corporation. This is how somewhat scandalized electric trucker Nikola became a public company. Buyer beware.

Is it frothy out there? Obviously. Software company Salesforce is selling at 100 times trailing earnings. Newly minted IPO sensation Snowflake is selling at 200 times . . . revenue! Through Sept. 30 U.S. venture capital funds had invested $88 billion, well above the $66 billion for all of 2000. It was $41 billion in 2012.

Traders often look at market signals like the volatility index and put/call ratios to identify speculation. Now they can just look at bitcoin, which still isn’t widely used for much of anything but is a pretty good speculative divining rod. It ran unimpeded this year to $18,000 but then sold off almost 10% of its bloat on Thanksgiving Day. It’s a reminder that stocks too can drop 10% at the drop of a hat.

Speaking of which—Tesla was recently added to the S&P 500, forcing $11 trillion in indexed money to clamor for its shares and driving its value to an eye-popping $555 billion. As I’ve said before, that’s a huge multiple on zero-emissions regulatory credits tied to a money-losing car business. Most think the Biden administration will keep the green juice flowing, so the Tesla train parties on.

How does it end? I can guess why but not when. Remember, a stock’s value is in expectations for future earnings, not what happened in the past. This market mania ends when reality doesn’t meet expectations and speculations. There are signs. The dollar is weak. In October spending was up 0.5%, but income was down 0.7%. That doesn’t sound good.

A Heard on the Street headline last week suggested: “Facebook Ads Could Be Reaching Saturation Point.” Apple’s gross margins are declining. Google has an antitrust dragon breathing on it. The oil and energy markets will eventually revive.

Perhaps the biggest risk to tech stocks is the one no one seems to consider: that Covid vaccines get distributed by next year, and that work from home, or WFH, rolls over and life returns to normal. “RTN” may be the ugly acronym of 2021. WFH stocks like Zoom, Amazon, Teladoc and maybe Netflix might still grow, but not as fast, failing expectations as life regresses toward the mean.

If you’re bold, enjoy the ride in the meantime. But please, don’t throw away those Dow 30K hats. Put them in the back of your drawer along with other not-quite-obsolete items, like that Keith Richards photo and your AOL password. 

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