The column “René wants profitability”: Banking crisis and dotcom bubble: unpleasant memories return to the stock market
There is really nothing to complain about in the stock market. Courses continue where they left off last year. The MSCI World index is already up more than four percent. There was a new record in the Dax. I can't shake the feeling that everything is too good to be true right now.
There are two things in particular that are going through my mind right now. One of them is a possible return of the banking crisis in the United States. Remember: In the spring of last year, the market was violently shaken by the bankruptcy of Silicon Valley Bank. Many regional banks also encountered difficulties. Fortunately, the Federal Reserve's courageous intervention quickly brought the situation back under control.
But now it turns out that this could have been a deceptive calm: regional bank New York Community Bancorp (NYCB) surprised investors earlier this month with a quarterly loss. The reason for this was, among other things, the high value adjustments on loans for office properties that were at risk of default. In two days, the stock lost about 45 percent of its value, which also put pressure on the values of other US regional banks. According to rating agency Moody's, the bank's creditworthiness is now at the junk level.
About the author Clemens Schömann-Finck
Clemens Schömann-Finck is a financial expert and is behind the YouTube channel “René wants profitability”. In his FOCUS Online column he highlights current issues related to the stock market and investing. He subscribe to his newsletter here for more financial information.
Foreign banks are also affected
NYCB is not the only bank reporting problems. Foreign banks are now also included. Japanese bank Aozora also had to significantly increase its risk provisions for US commercial real estate, causing the institution its first annual loss since the financial crisis. The stock then lost a good third of its value. Deutsche Bank also had to significantly increase its provisions for US real estate loans at risk of default compared to the previous year: specifically to €123 million. That's quadrupling. Deutsche Pfandbriefbank is also affected by developments in the commercial real estate sector. As a precautionary measure, it reserved up to 215 million euros and, when presenting the business figures, spoke of the “biggest real estate crisis since the financial crisis.” The stock is trading at an all-time low. A real estate fund owned by private equity firm KKR significantly cut its dividend to prepare for loans at risk of default.
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“The situation makes you a little nervous,” Handelsblatt newspaper quoted Rüdiger Bachmann, an economics professor at the American University of Notre Dame. Real estate investor Barry Sternlicht also gives a clear warning: “The office market is in an existential crisis.”
The graph below, for example, shows how dramatic the declines are in individual large cities.
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Sternlicht believes that billions of dollars in losses could occur in the office real estate sector. The market was worth a good $3 trillion before the pandemic and is now worth a good $1.8 trillion, Sternlicht said at a recent conference.
More extreme than during the dotcom bubble
What catches my attention, in addition to the banks' problems, is the extreme valuation of technology stocks. A JP Morgan study recently concluded that the situation is almost more extreme than during the dotcom bubble. To do this, the analysts looked at the MSCI USA (unfortunately it is not the MSCI World, but given that the US has a weight of almost 70 percent there, the overlap is very large). They compared the top ten stocks today and then. The first thing that surprised me was that, despite the technological bubble, the companies with the highest stock market value at that time were not just any Internet companies, but well-known corporations such as Pfizer, Exxon, General Electric or Citigroup.
What can already be seen in the colors of the graph: the concentration of the sector is significantly higher today than then. At the turn of the millennium, the top ten stocks came from six industries; today there are only four. The historical average is eight.
Another result of the study: the valuation premium for the top ten is higher today than it was then. To do this, the analysts compared the profit profitability assumed by the market then and now. These returns result from the P/E ratio. Their calculations showed that the gap between the expected returns of the top ten stocks and the rest of the stocks in the index is larger than it was then. This shows how high investor expectations currently are.
Mocking your own feelings
And despite all this, stock prices are rising? Maybe now you understand why this makes me a little nervous. I think the more the markets go up, the bigger the fall will be if something goes wrong with tech stocks or bank loans. On the other hand, everything can turn out well. The high valuation of technology stocks may also dissipate if the rest of the stocks do better in the coming months, for example, because there is an economic recovery across the board. And problems at banks don't necessarily have to escalate. US Treasury Secretary Janet Yellen considers the situation “manageable.”
That's why I'm glad I created a savings plan. This is my tactic to not let my fears paralyze me. If it goes well, I will continue. If it goes down, I can buy cheaper. Ultimately, what matters is where prices will be in ten years, not ten days.
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