Another pair of charts courtesy of the terrific Ron Griess of The Chart Store.

The first looks at the 2000 bubble in Technology, and how stocks behaved after that crash. The second is a look at a similar boom and bust — the financial sector bubble and collapse.

The technology boom was actually bigger than finance in terms of the SPX — it hit 33% of the S&P500 from 5% over 6 years. However, the finance boom lasted much longer, covering 15 years and rallying from 6% to 22% of the S&P500. I have not crunched the numbers, but I suspect that as a percentage of GDP economic activity, the finance boom was considerably larger.

Given that we know market history does not repeat precisely, but so often rhymes, the question confronting investors today is this: Will the future of the finance sector be similar to that of tech?

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Information Technology as a Percentage of S&P500

6-5-09-gics-sectors-1

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Financials as a Percentage of S&P500

6-5-09-gics-sectors-2

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This places the current reaction of the finance sector somewhere in mid 2003, following the first major bounce.

Category: Finance, Markets, Technical Analysis, Technology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Technology & Finance Bubble Aftermaths”

  1. Mike in Nola says:

    Why are we not still in the first major bounce?

  2. km4 says:

    I think the comparison is N/A

    The first looks at the 2000 bubble in Technology
    1) this was largely driven by too much VC $$$ chasing too few good sustainable business models
    2) the term Information technology is too vague and not enough granularity and metrics – once again much of this was Internet puff not enterprise

    Now contrast this to financial industry where I keep on coming back to this blurb by Simon Johnson in his excellent piece The Quiet Coup http://bit.ly/9QobY

    “From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent”.

    America needs to lessen it’s dependencies on financial engineering and consumer spending ( 70% of GDP ) as key drivers of the debt laden ‘bubble’ US economy.

    The financial engineering racket is simply the best organized white collar crime organization ever !

  3. Mike in Nola says:

    To explain further what I meant:

    The scales on the bottom look about the same. If you look at the steepness of bounces, the steepness of the rally we are in matches more closely the 2001 bounce than the 2002 -3 bounce.

  4. Super-Anon says:

    I still maintain there was no bubble in technology stocks in early 2000 and that everything since then has simply been irrational selling.

  5. emmanuel117 says:

    Uggh, I still have MSFT and CSCO from those times, sitting in an account somewhere. 7 years sideways = FAIL.

  6. constantnormal says:

    The 2000 IT bubble was fundamentally driven by pulling all IT spending back and applying it to Y2K work. The internet froth was simply a reflection of the upgrade to new technologies and some natural exuberance from the excess of money available.

    When Y2K came and went, all the momentum in that area came to screeching halt, and we entered what was basically an IT inventory recession, with manufacturers geared up for the past spending trends in a *zero* spending environment, corporate budgets having pulled forward years of normal work to deal with the overhaul of most of the systems they had spent the past 30 years constructing. And of course, all the internet froth went away, along with the money.

    While the charts are similar, the underlying causes are not. There was no discernible requirement for everyone to rush out and over-leverage themselves in the banking bubble, other than the fact that money was freely available, crying out to be used. With nothing sensible for it to be applied to, we chose to apply it no nonsensical things (CMOs, CDS, etc). Excess money WILL be applied to something, barring a climate of abject fear and terror.

  7. constantnormal says:

    “no nonsensical things” should be “to nonsensical things”

  8. Bruce in Tn says:

    @constant:
    Yes, excess money will be applied on April 15…

    some solutions are SO easy to predict…

  9. CNBC Sucks says:

    Ritholtz on the previous thread: “I am trying to avoid being too cynical, but I fear you may be onto something . . .”

    Ritholtz, get busy living or get busy dying. We need more fire and brimstone from the enlightened such as you. Take the gloves off and punch a Republican (other than me). If we collectively do not right the fundamental moral ethos of American business, politics, and media, humanity itself will be a bubble and capitalism will end up cannibalism.

  10. Dexter says:

    So now that the Big Banks are saved (yay), where will they make their profits?
    CDO’s? Aren’t they gone?
    Mortgages?

    They have to jusify their > 36 P/E’s somehow.

  11. Todd says:

    Sideways will be the main trend, the range has not been established yet.

    The govt has done a good job so far in placing a floor. The act of placing a floor has introduced an implied ceiling. How strong the floor and ceiling are remains to be tested.

  12. ben22 says:

    emmanuel’s comment above is pretty interesting I think.

    Dividends should become more important again to savers instead of most people thinking about capital appreciation.

  13. Mannwich says:

    If this is how the market action is going to be all summer (which I don’t think it will), might as well take the summer off and hit the links or beach. Booorring……

  14. ben22 says:

    Will the future of the finance sector be similar to that of tech?

    Who knows, but the NAS chart building up and decline since 2000 looks a lot like a chart of the Nikkei. We all know how that’s turned out.

  15. Mista B says:

    A lot of good came out of the technology bubble, despite the fallout in the stock market. The internet is now a need not a luxury, and people are connected all over the world. Modern laptops are far, far more powerful than desktops used to be, and they cost less (inflation-adjusted they cost FAR less than they used to). You can easily stay connected to your home computer at all times.

    The 2000 market collapse deserved to happen. Stupid behavior drove prices to stupid levels. But strong companies emerged–Microsoft (I know, I know, they’re the debil!), Cisco, Intel, Apple. Now Google. The financial bubble was similar in some ways, different in others. Instead of stock prices bubbling, profits did, built up on excess leverage. So the profits were as much of an illusion as the hoped-for profits of the tech bubble. The financial sector simply will not return to the days of 30x leverage anytime soon. (Probably in 80 years when history will repeat–AGAIN.) That means shakeup in the industry right now. Lots of jobs permanently destroyed.

    That’s why I think this whole rally is a farce. The Financials are up 100% in three months! This is the new bottom? My arse. Bottoms aren’t formed that way. Shoot, the homebuilders still haven’t formed a clear bottom, and they started collapsing a year and a half before the financials. Further, asset prices are still falling, which means more pain for financials. This is factored in? Please. Nobody knows where profits will level out for financials yet, so trying to put a price on it is speculative at best. Profits dropped over 100% for the sector. That is utter collapse. While I have no doubt doubt many babies got thrown out with the bathwater, what’s been clear is that the biggest financials were dirty, dirty bathwater. And there’s more pain ahead in that sector given that (1) home prices keep falling and absolutely need to fall further in the big metro areas where the biggest loans are; (2) commercial real estate prices are still falling and need to fall further; (3) real consumer spending is down and will stay down since people can’t pull forward expenses anymore via borrowing on credit cards and HELOCs.

    After the 1929 crash, the banking index stayed low for DECADES. Forget financials as a group. It’s going to be dead money for years.

  16. DL says:

    Mannwich @ 1:44

    Anyone who thinks that the market is just going to rise 1-2% every week can go ahead and sell some out-of-the money put options. One thing’s for sure… doing that would definitely relieve the boredom (for better or worse).

  17. call me ahab says:

    CNBC Says:

    “humanity itself will be a bubble and capitalism will end up cannibalism.”

    so . . .uh, no more good restaurants- no more Chotchkie’s?

  18. leftback says:

    The chart above is missing the Mighty Colossi Henry Paulson & Tiny Tim holding up the financials on their backs. Or to be more correct, the US taxpayers’ backs.

    “This is the new bottom? My arse.” “After the 1929 crash, the banking index stayed low for DECADES”

    True, so true. Those lucky eager punters who bought C and BAC recently will get: …..DILUTED

  19. dead hobo says:

    10 minutes from today’s pump?

  20. willid3 says:

    maybe the banksters have figured out how to make money. pump up oil, dump it on investors (AKA suckers), repeat until desired profit has been attained?

  21. Marc1 says:

    I agree with km4 who wrote:

    I think the comparison is N/A

    The first looks at the 2000 bubble in Technology
    1) this was largely driven by too much VC $$$ chasing too few good sustainable business models
    2) the term Information technology is too vague and not enough granularity and metrics – once again
    much of this was Internet puff not enterprise

    I would add a few points:
    3) the tech sector actually creates something (more on point #2 and assuming we don’t classify
    pets.com as a technology company
    4) the financial services sector merely allocates capital; it doesn’t make the country intrinsically
    wealthier
    5) the post-2001 figures for “Information Technology as a Percentage of S&P500″ are artificially low
    because financial services and real estate were artificially high
    6) I recall that the NVCA reports that about $225 billion has been invested through VCs since 2000.
    Compare that to the bailout/giveaway, and then compare the number of good jobs and true
    increase in national wealth created.

  22. alfred e says:

    @constantnormal: Y2K fueled tech bubble? Don’t think so.

    Other comments re VC$$. Close.

    Wall street created the tech bubble out of the vapors. The telecom reform act of 1996 powered it.

    CLECs were the Wall street rage. And they had business plans going nowhere and yet WS was pumping.

    Lucent sank because of their generous financing. A s did Nortel. They were tripping over each other to book sales and pump WS.

    Jack Grubman? Fraud. Pump. Would have served CNBC quite well as a commentator.

    Ten year WS cycle. Read “What Really Happened to Lucent”. Pump. Lose trust. Wait for people to forget. Rinse. Spit. Repeat.

  23. [...] Barry Ritholtz: Technology & Finance Bubble Aftermaths [...]

  24. [...] Barry Ritholtz: Technology & Finance Bubble Aftermaths [...]

  25. larry says:

    The tech bubble had several factors. Y2K, maybe. But the Internet/.com and telecom stocks were driving the bubble. I’d like to echo alfred e’s sentiment. People remember Amazon.com and pets.com, etc. but what about the emergence of Qwest, Global Crossing, WorldCom, etc.?

    Yes, there was a fundamental technological change: the switch from circuit to packet switching networks. But that has taken the better part of the last decade to play out.

  26. expertexpat says:

    Total credit market debt as a percentage of GDP has risen from 130% of GDP in 1952 to 350%
    of GDP today. The various bailout and stimulus schemes enacted in the last year will drive
    this percentage above 400% in the near future. When a country allows this much debt to
    accumulate versus its GDP, they have done something seriously wrong. The country’s
    politicians, business leaders, and citizens have all contributed to this disaster.

    recommended reading…good articles

    There is also the rational level, of which to I am
    referring to above. Realistically, I know the beast in us will take over and this will end
    like it did in France in the 1790′s. I will, however, not be the one holding the sword.

  27. johnbougearel says:

    This was a great visual from Ron Griess, particularly when you add a pic of the Nikkei sinc 1989 alongside it ~ still trading a 75% discount ot peak valuations 20 years ago.