“That’s Not A Bubble. THIS Is A Bubble”

Last week, in a highly amusing note on “FANTASY” stocks, Citi delivered the following glowing endorsement of current tech valuations:

More critically, tech stocks as a whole are not as outrageously priced versus levels seen back in 2000.

See there? You should be confident that tech isn’t in another bubble because it isn’t “as outrageously priced” as it was during the dot-com boom. Kind of like, “those tulips may seem expensive, but they’re not nearly as overvalued as they were during the Tulip Mania.”

Anyway, an extension of the tech debate (which, you’ll recall, began to heat up in earnest after Goldman helped catalyze a selloff in the space three Fridays ago with a note that basically suggested FAAMG, by virtue of a rising correlation with growth, momentum, and most worrisome, volatility, has become embedded in multiple factor-based strats and may therefore be subject to risks that might not otherwise be there), is the idea that growth stocks may be in a bubble.

That notion gained a lot of traction when, on the same Friday that Goldman released their FAAMG note, growth stocks suffered their largest daily decline versus value since 2009:

But Citi wants you to know that really, there’s not much to worry about here.

Why? Well, for the same reason they outlined in the note linked above. Namely that the bubble was much bigger during the dot-com boom and if you sell now, you might miss out on participating in another devastating boom-bust…

Via Citi

Late 1990s Was Much Bigger

This latest burst of Growth/Value volatility inevitably draws comparisons to the late 1990s. Back then, the first big daily Growth/Value sell-off happened on August 31st 1998, when US Growth stocks dropped 3% relative to Value stocks. But that marked the beginning of the Growth stock bubble, not the end (Figure 17). The US Growth index doubled again over the next 18 months. Woe betide any fund manager who switched into Value stocks at the first sign of volatility back then.

While current valuations of US Growth stocks are clearly starting to look stretched, they are still trivial compared to those seen in the late 1990s. The latest PBV of 5x is still well below the August 1998 level (8x), let alone the 17x PBV seen at the 2000 peak. If we really were to see anything like a repeat of this extraordinary period, Value investors could suffer a lot more pain.

So basically, “that’s not a bubble, THIS is a bubble”…