New York, NY, USA – July 6, 2022: Front view of the NASDAQ MarketSite, which occupies the northwest corner at the base of the 4 Times Square building, in Midtown Manhattan, New York City.
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The U.S. tech market has had an incredible run. Prices of the leading companies have reached nosebleed levels – so much so that even perma-bulls are starting to wonder whether these valuations are sustainable.
The world now thinks in trillions rather than billions. I’m old enough to remember when hundreds of thousands mattered.
Let me be clear: I am not a momentum investor. My investment DNA is that of a contrarian value investor. Yet I’m not going to be fashionable bearish either. I believe a bubble is forming in the Nasdaq, and we need to keep that in mind as things unfold.
The first thing to remember is that bubbles can long outlast logic. When the market drifts into bubble territory, it creates a logic of its own. When that magic spell eventually breaks, prices collpase, and suddenly no one remembers why things got so out of hand – or wants to admit they once believed in it.
So here is the big, big picture that defines the current status quo:
Five years of the Nasdaq chart
Credit: ADVFN
Granted, this is a generational chart, but it either has to steepen or break – or, more likely, steepen and then break. I believe the latter is what comes next, though it won’t happen overnight. There’s a saga ahead.
My theory is that we have one final vertical surge before a major breakdown. As investors, our task is to avoid being caught in that pullback while trying not to miss the best of the bubble’s rise.
The Nasdaq is the market’s driver—it sets the pace. Behind it, jogging along, is the good old Dow, which tells a different story. While it’s hard to imagine the Nasdaq suddenly imploding, the Dow suggests the possibility of a bear market:
Possible trajectories for the Nasdaq
Credit: ADVFN
Here you can take the perspective of a bull or a bear and see which outcome plays out. Personally, I think the bears won’t be rewarded in the near term. I’m a reluctant bull.
However, the faster the Nasdaq climbs in the coming years, the more vulnerable it becomes to a severe decent. Markets love to overshoot when FOMO takes hold, as the swagger of risk-hungry winners pulls in greed-driven newcomers. But we’re not at that stage just yet.
Fundamentally, AI is about to set the ignite the global economy. If global governance doesn’t derail it, the world will enter a period of extreme abundance – one that makes today’s economic scale look trivial. That, in turn, will drive markets to new highs.
This is how the Nasdaq could reach 50,000. Yet the speed at which it gets there will heavily influence the likelihood of crashes along the way.
Here’s a chart to illustrate how too much of a good thing can go wrong:
My guess as to how steep the Nasdaq rise could be
Credit: ADVFN
I expect the coming bubble to rise somewhere between the red and amber lines, leaving plenty of room for pullbacks along the way.
Interest rates are coming down, AI is rising, QE is returning, and the U.S. government is going for broke on growth – with it, a historic pump.
WCGW?
Plenty.
But you can’t sit it out.
Click here to watch a video where I talk about the Nasdaq bubble