Short History of Manias

The Bail-in

We hope that you are well and enjoyed the Labor Day weekend.

Periodically, we write analyses of key market issues which we believe are important to market developments. This email is to alert you to a potential correction in the stock market, which may have a more significant impact on market leaders, including Facebook, Apple, Amazon, Netflix, Google and Microsoft (FAANGM), which have increased 20 fold in price, as a group, since the 2009 low.

Manias are generally defined as price increases of 10X to 20X within a decade and are generally unsustainable. Below is a history of financial manias driven by investor preoccupation with specific assets or asset classes over the past 60 years. These include peaks in Disney in 1973, gold in 1980, Japanese bank stocks in 1989, NASDAQ’s “Dot Com” bubble in 2000 and iron ore in 2011.

History of Manias of Past Decades

Walt Disney was one of the “Nifty 50” companies, termed “one decision” stocks because they were bought and never sold. Each was a leader in its own industry with a strong balance sheet, high margins and double-digit growth rates. This group of stocks which included Avon, Disney, McDonald’s, Polaroid and Xerox peaked in January 1973 and would lose an average of about 80% of their value by December 1974. This decline was similar to the loss on the NASDAQ Index from its peak in March 2000 to its low in October 2002.

The market leaders encounter different issues in each era. One important issue for the FAANGM companies is a redefinition of antitrust laws on monopoly power, which is already underway. While Facebook is under investigation for censorship of news and advertisements and buying rivals to inhibit competition, Google is accused of using its search and advertising empire to limit rivals and direct consumer choices. Apple and Amazon are also under review for their anti-competitive practices. A second issue is higher taxes since most governments worldwide are expected to raise corporate tax rates and re-define where their businesses are conducted to increase their corporate tax receipts.

Stock indexing has become such a popular strategy that there are now more Exchange Traded Funds (ETFs) than there are listed stocks. The growth of ETFs has accentuated the concentration of investments in the top stocks because the ETFs that own them have become the best-selling funds. The NASDAQ stocks in general, and the FAANGM stocks in particular, have substantially outperformed other US and global stock markets over the past 11 years. They also have many of the attributes of the “Nifty 50.” Because they have performed so well, investors who have tucked these gems away may find that they now represent an outsized portion of their portfolios. We believe that investors would be wise to re-examine any overweight positions in terms of an allocation they would make as if it was a new purchase.

Current capital gains taxes are favorable at both the federal and state levels, but they are likely to rise no matter who is elected. Given the current geopolitical challenges, there are likely to be a number of future opportunities to redeploy cash raised at more favorable valuations.

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