Economists Don’t Expect This Tech Boom to Be Like the Last One

April
27

Written by: Jon McGraw

Remember the dot-com bubble?

If so, you’ll appreciate this notable event: The Nasdaq Composite Index, which includes a fair number of technology stocks, transcended its previous high (set in March 2000). Share values in the tech sector gained 4 percent last week as major players in the space delivered better-than-expected earnings results.

The performance of technology stocks has some wondering whether this tech boom will be like the last one. In the go-go ’90s, technology startups attracted hundreds of millions in venture capital funding. Some, like not-very-memorable fashion retailer Boo.com, burned through $135 million of venture capital and went belly up the year after it launched. Others, like TheGlobe.com, a social network service with no earnings, went public in 1998 with a target share price of $9. Investors paid as much as $97 a share during the first day of trading. By the end of 2000, the stock price was worth less than a dollar a share.

Things are different this time around largely because a lot more economic activity takes place online today. About $50 billion is spent on online advertising in the United States (compared with $8 billion 15 years ago) to reach an audience of 3 billion people (compared with 400 million in 2000). The business paradigm has changed, too, according to Financial Times:

“This time around, many [companies] are being built to be sold to one of a handful of cash-rich acquirers … in the consumer internet markets, or … in enterprise software. In fast growing fields such as artificial intelligence, backers of more mature start-ups complain about the excess of early-stage venture capital flooding in, from investors hoping to sell out quickly to one of the giants.”

The Dow Jones Industrial Average and the Standard & Poor’s 500 indices showed gains last week, too.

Data as of 4/24/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.8% 2.9% 12.7% 15.6% 11.8% 6.2%
Dow Jones Global ex-U.S. 1.7 8.8 1.8 7.3 3.3 3.7
10-year Treasury Note (Yield Only) 1.9 NA 2.7 2.0 3.8 4.3
Gold (per ounce) -1.7 -1.4 -8.4 -10.5 0.5 10.6
Bloomberg Commodity Index -0.2 -2.6 -26.5 -9.7 -5.6 -4.3
DJ Equity All REIT Total Return Index 0.9 2.3 18.0 13.0 13.0 9.0

How Do You Define Investment Success?

The Natixis 2014 Global Survey of Individual Investors offered some interesting insight into the mindsets of investors in Asia, Europe, Latin America, the Middle East, the United Kingdom and the United States who participated in the study. There was some good news and some bad news. First, the bad news:

“Investors around the world say they’ll need average returns of 9 percent a year, above inflation, to meet their financial goals, a figure well above the average annual return of the markets over most rolling periods during the past century.”

This is a remarkable expectation. Second, it’s not achievable without taking considerable risk, and the vast majority of investors surveyed said, if they had to choose, they would opt for safety of principal over performance potential. In other words, they wouldn’t take the risk necessary to earn such a high potential return. It’s important to set realistic expectations for portfolio returns—expectations that reflect risk tolerance and long-term financial goals.

The good news, at least for U.S. investors, was found when participants were asked to describe the way they defined investment success. Answers overlapped in many regions, but only the highest percentage of any region is shown for each statement below:

Outperforming my friends/family/colleagues 9 percent Middle East
Achieving my short-term investment goals 21 percent Latin America
Outperforming the market 22 percent Asia
Being on track to achieving my long-term investment goals 37 percent United States
Not losing principal 30 percent Europe
Only making gains and no losses 30 percent Europe

 

U.S. investors were more likely to have financial plans than investors in other regions. However, slightly more than one-half of Americans said they had clear financial goals.

Weekly Fun—Think About It

“There is nothing worse than a sharp image of a fuzzy concept.”

—Ansel Adams, American photographer