The speculative extremes on Wall Street today resemble latter-stage bull markets of the past, rather than a young healthy one, cautions Jim Stack, money manager and editor of InvesTech Research.
We wrote about initial public offerings (IPOs) and Special Purpose Acquisition companies (SPACs) — also known as blank check companies — back in August. Since then, investor appetite for new publicly traded companies has amplified in a big way.
IPO mania was one of the defining hallmarks of the Tech Bubble, and the recent frenzy in IPO activity is the most extreme since that period. There has been a rush to go public by many companies in an attempt to raise capital and take advantage of today’s frothy conditions.
Given the sky-high prices for recent IPOs, we wouldn’t be surprised to see many more companies sprinting to go public in the near future. The Renaissance World IPO Index tracks the performance of companies that have recently gone public.
Since its bear market low earlier this year, the Index has rallied by an incredible +152%, as a “can’t lose” attitude on the part of many investors is fueling speculation to a degree that hasn’t been seen in over two decades.
What’s occurring on Wall Street is both fascinating to watch, and potentially very dangerous for investors who don’t understand the underlying risks and the importance of watching for warning flags in the year ahead.
While overvaluation does not cause a bear market, it does relate directly to the level of downside risk in the next bear market.
InvesTech Research has written about some very impressive bubbles in our 40 years of publication, and today’s IPO market has all of the same speculative attributes.
There are valid reasons to be invested in this market, but this dangerous level of speculative fervor is reason for caution in the near-term.