Third Quarter 2020: Tech Bubble 2.0?
Investors rode a $20-trillion global stimulus tsunami to fresh highs over the summer before renewed concerns put a pause on the rally in September. July and August were a continuation of the rebound from the market bottom in late March, with risk assets, particularly technology-oriented shares, reflating amid better than expected data. September, meanwhile, saw a partial unwinding of the growth trade amidst investor concerns over a stalled economic relief bill in Congress, renewed coronavirus concerns, and market volatility surrounding the upcoming November election. Even with the market pullback, global markets were up 8% in the quarter and are now up 1% for the year.
The capital markets, which had rallied almost nonstop from the March lows until August, began to show signs of excess exuberance. Initial public offerings raised more money than at any point outside the tech bubble, high-yield debt has been issued at record low yields, and day traders poured money into technology darlings, increasingly through the use of options, that have contributed to wild price swings. Additionally, futures markets appear to be increasingly wary of a slow or contested election process, pricing in the most volatile November election period on record.
The September stock market adjustment had no corresponding rally in the bond market. Yields, which sit at record lows, were little changed in September, possibly due to the Federal Reserve’s reassurance that they do not anticipate raising rates over the next two years. The Federal Reserve also announced a new operating framework in which they will allow inflation to “catch-up” for any past misses. Jerome Powell, using the customary Fedspeak, provided few concrete details on how the FOMC might adjust monetary policy to meet the new framework.