Despite virtually unending predictions of its demise, the bull market continues. It is tempting to compare the current situation to the dot com bubble at the beginning of the century. But, Mark Cuban, the billionaire who profited from the dot com bubble and was not destroyed by the crash says that this is a different market. There were more investors twenty years ago and interest rates were higher. And, people were buying any stock with dot com in its name! So, when will the stock market rally stop? Cuban says to watch interest rates.
What Is Driving the Stock Market Rally?
Ever-higher earnings are a large part of why some of the big tech stocks keep going up. But, in an interview with CNBC, Dallas Mavericks owner and billionaire Mark Cuban says it has to do with interest rates. You’ll know when the rally is over when rates start going up.
Mark Cuban, who made billions of dollars during the dot-com boom, said Wednesday that the stock market is not reminiscent of 1999.
“Interest rates were a lot different back then,” Cuban said on CNBC’s “Fast Money Halftime Report.” “And you saw a lot more people participating in the market. … You don’t see that now. That individual day trading really led the market to be frothy.”
The levels of day trading have receded and given way to the rise of index funds, creating a fundamentally different landscape, Cuban said.
“There’s so much money chasing index funds, so as long as those funds keep on growing the market is going to go up,” said Cuban, who sold Broadcast.com to Yahoo in April 1999 for $5.7 billion.
His argument is that there is a lot of money looking for investments and, so long as rates are low, the stock market and its derivatives art still where the best return lies.
How Abruptly Will the Market Change Direction if Rates Go Up?
Investopedia discusses the effect of interest rates on investments in an article about what can cause a significant move in the stock market.
Rising interest rates can place downward pressure on real estate investment trusts (REITs) and slow the housing market. Higher interest rates mean higher borrowing costs slowing down purchasing activity and causing stock prices to dive.
These factors will come into play a bit at a time as rates go up and earnings drop off. However, the stock market anticipates events as wells as reacting to them. Many investors, like Cuban, will make adjustments as soon as rates start to rise in anticipation of the bull market ending. We have often noted that Warren Buffet’s silent warning to investors is that (like before the dot com crash) is stockpiling cash!
What Else Could Stop the Rally?
The threats of war, societal chaos, and economic collapse can all drive the market down temporarily. For example, the Chinese coronavirus may be an opportunity for some pharmaceutical stocks, but a global pandemic like the Spanish Flu epidemic a hundred years ago that killed 500 million worldwide would have widespread effects on the economy, investments, and governments!