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Several parallels between the dot-com bubble and today’s stock market are strong

I have been resisting the comparison between the dot-com bubble and today’s stock market, but the similarities have grown too strong to ignore. Here are five areas where the parallels are strong, along with one caution about applying the bubble label to the broader market.

Anything connected to electric vehicles or clean energy has gone ballistic in the past few months. Electric-car maker Tesla TSLA 0.20% is the most obvious example, becoming the fifth-largest U.S. company by value after rising eightfold last year. This year so far, it has added $134 billion to its market capitalization, far more than the $78 billion it was worth at the start of 2020.

Initial public offerings and the cash shells of special-purpose acquisition companies, or SPACs, now used as an alternative have been booming, attracting celebrity backers and allowing companies without any revenue, let alone profit, to join the market. The Renaissance IPO index, which tracks new listings, more than doubled last year, by far the best performance since it started in 2009. Perhaps most extreme was QuantumScape, QS -0.64% part-owned by Volkswagen, which hopes to commercialize its experimental solid-state batteries. It tripled in value to more than $25 billion during December, according to Refinitiv, before falling by more than half.

Don’t get me wrong, there are plenty of smart and well-informed small investors. But stocks are again being swung about by the sort of amateur mistakes made by a beginner hoping to win big. One I wrote about recently is to buy a stock purely because its share price is low, which should be all but irrelevant but which drove performance in the first couple of weeks of this year.

Even more excruciating is to buy the wrong stock, as happened with last year’s rush into Zoom Technologies, owner of the ticker ZOOM and not a lot else, rather than the better-known Zoom Video Communications ZM 0.15% (ticker ZM). This month Elon Musk’s call to use Signal, an alternative to Facebook’s FB 0.60% WhatsApp messaging software, led to the unrelated biotech stock Signal Advance SIGL -4.73% (ticker: SIGL) leaping from 60 cents a share to $38.70. It has plunged since but is still at $6.25, bafflingly.

These sort of mistakes made headlines in the dot-com bubble, too, as droves of newcomers rushed to trade stocks based on message-board rumors.

Detroit stalwarts General Motors GM 0.58% and Ford F -0.09% have both managed to sprinkle the magic dust of electric motors over themselves this year, along with South Korea’s Hyundai. Shares in the three have gained about a third this year, and GM and Ford are among the best performers in the S&P 500.

In 1998 and 1999 simply adding “.com” to a company’s name led to gains averaging 74% in the next 10 days, according to research from Purdue University academics in 2001. Aside from a few tiny stocks trying to cash in on bitcoin mania, the only notable example of this so far is the Hong Kong-listed health division of one of China’s biggest property developers, which changed its name to China Evergrande New Energy Vehicle Group 708 -1.97% last summer. Its shares soared, and it plans to launch electric cars this year. I mean, GM used to make fridges, and Toyota started out making looms, so sure, build apartments and electric cars.

Stocks in fashionable areas such as electric cars and solar power have soared.

Many of those who were early investors in renewable power or electric cars have cashed in some or all of their gains to shift to other, cheaper, areas offering growth, even as they continue to believe in the underlying theme.

James Anderson, partner and investment manager at Edinburgh fund manager Baillie Gifford, was an early investor in Tesla and even after selling a lot is still one of the largest shareholders. He is concerned about the wild demand for IPOs and SPACs in anything connected to batteries, solar and electric vehicles. “Is it rational? I don’t really think so,” he said.

David Older, head of equities at French fund manager Carmignac, has sold Chinese electric-car stocks that soared in favor of established car makers he thinks will succeed in the electric-car business.

“There does seem to be some irrational exuberance, especially with companies that have no products today,” he said.

Even if you agree that today’s glamour stocks are overly frothy, there is still a question about whether that extends to the broader market. There’s a good reason to think not, at least not as a true bubble:

Treasury yields are superlow, and the Fed has promised not to raise interest rates. That justifies higher prices for stocks with reliable long-term cash flows, including Big Tech stocks such as Apple AAPL 1.61% or Facebook. Compared to a 10-year bond, U.S. stocks don’t look expensive.

Of course, investors might be wrong either about future cash flows (antitrust, people!) or about the outlook for bond yields. Either could lead to the stocks going down, perhaps by a lot. But falling because fundamentals changed isn’t the same as falling because a bubble burst, which typically leads prices to plummet further and faster.