Today Vs. The 2000 Dot-Com Bubble
Today Vs. The 2000 Dot-Com Bubble
There has been a lot of chatter lately comparing today’s stock market with the tech Dot-com bubble of 2000. Investors are understandably nervous, because technology has propelled this market just like it did in 2000, which ended in a bear market crash.
However, there are similarities. The current bull market has been led by just a few mega-cap stocks. These companies, because of their size have largely been driving the gains in the Nasdaq, primarily since that index is market-capitalization-weighted.
The difference this time around is that the gains are much more evenly distributed than most realize. It’s not just the Nasdaq approaching new highs. The S&P 500 has been pumping along as well.
The current macro-economic backdrop of today is very different than what we had heading into the 2000 market. As Tony Dwyer illustrated so eloquently:
- Fed policy. The Fed began raising short-term interest rates in November 1998 following the bailout of Long-Term Capital Management (LTCM). Heading into the mid-2000 peak in the market, the Fed had raised rates six times from 4.75% to 6.5% and the Real Fed Funds Rate was elevated well above mean. Despite the incredible productivity growth at the time, then Fed Chair Greenspan was very concerned the tight labor market and historic rise in asset prices would lead to heightened inflationary pressures. Clearly that is not the case today as current Fed Chair Powell has stated the Fed is fearful of deflationary risk and stated explicitly the Fed is “not even thinking about thinking about raising rates.”
- Yield curve. Although the 2-10-year U.S. Treasury yield curve briefly inverted in 1998 prior to the LTCM crash, the more sustainable inversion began in February 2000, which led to worsening financial conditions that ultimately led to a credit-crisis-driven recession. The recent steepening has been slower than what historically takes place but it is already after we have had an inverted yield curve and recession.
- Financial conditions. We use the Chicago Fed’s National Financial Conditions Subindices (NFCI) to measure financial conditions and credit stress as seen through 105 indicators. There was a clear trend of tightening financial conditions from 1998 through early 2000. While the NFCI Subindices spiked with the COVID-19 shutdown, they have seen a trend toward “easier financial conditions since early April.”
- Global growth. The COVID-19 pandemic led to an almost unprecedented global shutdown that is now transitioning into a synchronized global recovery. Of the 37 economies tracked, the percentage of OECD Composite Leading Indicators showing expansion was zero in the June reading (data works with a six-week lag); but, 90.6% are now showing a positive monthly gain. The only other zero reading with a 90% monthly reading was early 2009 when the economy and market began to turn higher.
- Market breadth. Again, it is true that a few technologies-based mega-cap growth stocks have dominated the returns of the market cap-weighted indices since the March 23 low, but the Cumulative NYSE Advance/Decline (A/D) line reached a new all-time record high this week as well. The opposite was true heading into the market peak in early 2000, where the A/D line had been in a downtrend since the peak in 1998. A few stocks are currently driving the majority of the gains, but the average stock is acting way better than what took place near the March 2000 market peak that ushered in the “dot com” bust.
- Stock correlations. The median 63-day correlation of each SPX component issue vs. the SPX Index was printing a record low near the August 2000 retest of the market peak, while currently, it is just beginning to decline from a record high.
In short, today’s world is being driven by:
- Historically low core inflation that gives the Fed permission to print money.
- The Fed should keep rates at zero for the foreseeable future given inflation.
- Due to monetary and fiscal stimulus measures, money availability as seen through real liquidity is beyond historic.
- The global economy is at the beginning of a synchronized recovery.
- EPS should recover into 2021 and valuations are expanding.
Given today’s macro-economic backdrop, the world is noticeably different than it was in Y2k. The combination of historic monetary and fiscal stimulus, enormous excess liquidity, and a synchronized global economic recovery bodes well for investors.
However, my view on that will change if the same mega-cap “stay at home” stocks are still leading 6-12 months from now. That would imply that the economy is still shut down, and that would mean a negative backdrop for capital growth and especially credit, which in turn would increase market risk.
There are other distractions such as the trade war with China and the election, but neither of which should derail the recovery.
A word on the election: Many are worried that a Biden victory would spell catastrophe. A year ago I would have thought so too, but not so much today. I believe we can discount much of his gibberish on raising taxes because there is no way the economy would be able to handle the draconian changes he is pontificating. This is all political rhetoric and if elected, very little would change.
If you would like any financial planning or investment assistance, do not hesitate to contact me.
“Invest for need, not for greed!”