Are we in a tech stock bubble and if so, will it burst?
Well, are they? It depends on who you asked. To Tiernan Ray of The Technology Letter, evidence says yes, we are in a bubble.
According to Ray, two key features signal a bubble:
- High tech company valuations across the board.
- Large amounts of insider selling.
And we see both in the market — but just because there’s a bubble doesn’t mean it’ll burst. In the past year, we saw a lot of insider selling from large tech companies like Okta (cybersecurity) and Snap (social media/ advertising) just to name a few — with barely any insider buying.
But there are lots of reasons for insiders to sell so just because they are, doesn’t mean investors need to panic. It does tell us one big thing though, insiders aren’t sticking around.
Reasons for the high valuations: Mainly, there is no alternative (TINA).
- Bonds are barely giving any returns to investors and other asset classes seem expensive — leading to record amounts of money moving into stocks.
- But eventually, if stocks continue to stay flat while earnings continue to increase, valuations will eventually fall and they’ll look fairly valued again.
Should investors be worried? Depends on what you’re investing in. We’ve seen the volatility of speculative stocks earlier this year — with many losing over half their value. Remember, taking on more risk doesn’t always pay off.
In most cases, it pays to play it safe — i.e. investing in ETFs tracking large indexes like the Nasdaq-100 or S&P 500:
- The SPDR S&P 500 ETF Trust (NYSE:SPY) — is up 18.3% this year.
- The Invesco QQQ ETF (NASDAQ:QQQ) — is up 17% this year.
Can’t go wrong holding a portfolio of exchange-traded funds tracking large indexes.