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Friday nova charts

Any moment now, a dwarf star in the Corona Borealis star system will have been close enough to a neighboring red star for long enough to trigger a thermonuclear explosion so large it will be visible to the naked eye on Earth (3,000 light years away!). This is a once-in-a-lifetime opportunity for amateur astronomers like us to witness a “nova event.”

We might soon have a similarly rare opportunity to witness a legendary stock market event — on our current trajectory, we could be headed for the first true market melt-up since 1999.

The stars seem to be aligned.

The US economy continues to defy expectations with its much-anticipated hard landing now looking like a 2026 event, at the earliest.

The most recent data suggests inflation may have already landed, putting the Fed in the rare position of being able to cut interest rates while the economy is booming — a combustible investing mix, if there ever was one.

AI is genuinely transformational tech: Market bubbles need a story and AI is at least as big a story as the internet, which famously fueled the last great investing bubble. 

And the supernova that is Nvidia shares has captured investors’ imagination in a way we haven’t seen since Cisco led the charge in 1999 — NVDA is up another 162% YTD and it’s not unreasonable to think it has plenty more to go.

There are lots of reasons why it shouldn’t, of course.

The value investor Christopher Bloomstran thinks both Nvidia shares and the rest of Big Tech are already dangerously deep into bubble territory.

But I’m old enough to remember that there were at least as many bears as there were bulls at every stage of the dotcom bubble, too. 

The bears proved to be very right, of course, but only after a long stretch of being very wrong.

So it’s entirely reasonable to think both that 1) large-cap tech shares are far too expensive and 2) they’re about to get much more so.

Alas, these things are nearly impossible to trade.

The dotcom bubble effectively ended the careers of two of history’s most legendary investors: Julian Robertson, who was short, and Stanley Druckenmiller, who was long.

Incredibly, they both threw in the towel within about two months of each other as the dotcom bubble peaked (busting Robertson) and then burst (busting Druckenmiller) in early 2000.

If those two investing gods couldn’t time the dotcom bubble, we mere investing mortals surely don’t have much of a chance of timing this AI bubble.

But true investing manias are nearly as rare as thermonuclear explosions in space, so how can we pass up the opportunity to try?

I know I can’t.

So let's check the charts. 

1990s-style economy?

Check! The Fed’s GDPNow model sees the US economy growing a robust 3% in the current quarter.

Cisco-like champion?

Check! Among its many other incredible feats, Nvidia shares have 100x’d their weighting in the S&P 500, going from 0.07% in 2001 to 7.3% now. 

Record-setting FOMO?

Check! Koyfin notes that if you had put $10k into Intel shares 10 years ago and your neighbor had put the same amount into Nvidia at the same time, you’d now have $13,420 — and a new neighbor. Your old neighbor would be living on a beach somewhere with their $2.9 million of Nvidia shares. Ouch.

Some method to the madness?

Check! Like all good manias, the mania for tech stocks has a basis in fundamentals. In 2002, profits earned by components of the tech-heavy Nasdaq were only 4.5% of those for S&P 500 components. Today it’s 40%. 

Record-setting FOMO 2:

US stock market investors have added $12.5 trillion of paper wealth since the market bottomed last November. (And another $3.2 trillion in bonds, too.)

The US consumer is so back:

Bloomberg’s John Authers notes that the pandemic has shocked consumer spending back to the trend line it was chugging along before being derailed by the Great Financial Crisis in 2008 — perhaps another reason to think the US economy will remain stronger for longer.

Bears may be throwing in the towel:

Short interest in the S&P 500 and Nasdaq ETFs has fallen roughly 50% over the past year.

Overly consensus?

The Bank of America fund manager survey suggests we may all be leaning in the same direction, with nearly 40% saying they are overweight equities.

Retail is not far behind:

US households currently have about 35% of their net worth in the stock market, vs. 31% at the top of the dotcom bubble.

Valuations are bigger, too:

The top 10 US stocks now trade on 27x P/E, above the 24x P/E multiple they hit in the dotcom bubble.

The bear case:

GMO sees large-cap US equities returning an annualized -4.5% over the next seven years, in real terms (ie, accounting for inflation). A timely reminder that stocks do occasionally go down.

How should we play it?

One Wall Street analyst thinks US investors, already in mania-mode, will push the S&P to 6,000 before the bubble finally pops.

That sounds about right to me — a nova-like stock market that gets intensely brighter before suddenly blacking out.

But if these things were predictable, they wouldn’t happen, so my only real prediction is that things are about to get interesting — perhaps even in a once-in-a-lifetime way.

Have a great weekend, astronomical readers.

— Byron Gilliam

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