Author: Smead Capital Management

Many are wondering why the market for Initial Public Offerings (IPOs) has performed so poorly, even though the flood of hot new ones came to market recently. It took three years to choke demand for money-losing dot-com IPO companies back in 1997, even though Federal Reserve Chairman Alan Greenspan called the mania for tech stocks in late 1996 an “irrational exuberance.” What has killed the goose which traditionally laid the golden eggs on Wall Street?

We have written a good deal about the parallels of today’s market with the tech and telecom bubble of the late 1990’s. While no two time periods are ever the same, today’s rhymes are eerily similar in some respects, with the latest development in initial public offerings (IPOs) as the latest example. Like past market peaks that ultimately corrected due to excessive valuation levels, markets are now working to suck in fresh capital as they sell the sizzle before anyone has tasted the steak (vegetable based or not). Today’s reverence for disruption and innovation have created such myopia that we might be beyond meat altogether.

We believe the U.S. stock market will come down to a clash between one very positive forward-looking set of facts and a very negative set over the next ten years. Demographics argue for a much stronger economy, higher interest rates and a change in dynamics associated with stock market popularity. The parabolic move the last five years in e-commerce and other tech-related securities has unknowingly cursed forward-index performance and turned a whole generation of investors into growth stock aficionados.