The stock market is flashing signals that point to a dot-com style bubble, but fundamentals are healthier now, Schwab says

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  • High valuations and other factors have been driving comparisons between current US stock market conditions and those during the dot-com era, says Charles Schwab.
  • But market breadth now is contributing to a healthier environment, according to the investment firm.
  • More than 90% of the S&P 500's stocks are trading above their 200-day moving averages.
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Speculative behavior and other factors are inviting comparisons between current US stock market conditions and those during the boom-and-bust of the dot-com era, but today's fundamentals are more robust than two decades ago, according to investment firm Charles Schwab.

A "rash of speculative behavior, an ever-increasing number of day-traders, and still-high valuations," have been driving talk about how stocks are performing now compared with the dot-com boom in the late-1990s and the bust that followed in the early-2000s, said Liz Ann Sonders, Schwab's chief investment strategist, and Kevin Gordon, senior investment research specialist, in a note published on its site Monday.

The tech-concentrated Nasdaq-100 index during 2020 surged to its highest since its burst in the early 2000s. Then, the index "bore the brunt" of the bear market with its 83% slide between March 2000 and October 2002, said Schwab.

The Nasdaq 100 since last year's high been whipped around, falling into correction territory in March as investors reassessed the jump in tech stocks that Wall Street, in part, considered as beneficiaries from COVID-19 lockdowns and changing consumer patterns. A correction is considered as a fall of 10% or more from a most recent high.

"A handful of valuation metrics–including the S&P 500's forward P/E, the Buffett model, price-to-sales ratios, etc — have either met or exceeded the sky-high levels seen in the run up to the tech bust," said Schwab. "That has justifiably stirred up consternation among investors, but there are important caveats to note on why this current environment looks different."

For one, when the Nasdaq 100 in 2020 hit its post-dot-com era high, the S&P 500 index "moved in tandem with it," the analysts said. "In the late-1990s, the Nasdaq 100 at one point almost doubled in six months and the S&P 500 didn't come close to matching that parabolic spike. Consequently, the epic rise in the Nasdaq 100 led to an epic collapse, which ultimately brought down the broader market."

Secondly, market breadth differs now. For the S&P 500, breadth had started to "weaken considerably" starting at the end of 1997 and heading into the market's peak in March 2000, which at that point only 35% of its stocks were trading above their 200-day moving averages. Currently, more than 90% of the index's stocks are trading above their 200-day moving averages, which is "a much healthier backdrop as the market continues to advance," said the Schwab analysts.

The "persistently solid breadth over the past few months has likely shielded the market from its greatest foe — frothy investor sentiment across many behavioral and attitudinal metrics," they said.

The Nasdaq 100 has recovered some of its recent losses and was showing a gain of nearly 6% so far in 2021. It has climbed by 69% over the past 12 months. The S&P 500 has advanced by nearly 9% this year to reach record highs and has tacked on about 54% over the last year.

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