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Stock Market Debate is Trapped in the ’90s Drawing Comparisons for Both Bulls and Bears

February 11, 2024
minute read

The surge of interest in the 1990s has extended beyond Gen Z fashion influencers, captivating investors who discern contemporary relevance in that transformative decade marked by upheaval, renewal, technological acceleration, and eventual excess. Within the current stock market discourse, a debate ensues between the most skeptical bears and the most optimistic bulls, centering on which year of the '90s best aligns with the trajectory of 2024.

For those leaning towards a pessimistic outlook, the parallels between the present and 1999, a year marked by a parabolic surge in the '90s bull market, form a basis for concern. It was during this time that sentiment became unhinged, leading to behavioral and valuation excesses that eventually resulted in the peak of early 2000 and a subsequent multi-year collapse. On the flip side, optimistic believers in the enduring strength of the current bull market draw comparisons to 1995. This particular year is remembered in economic history for its seamless soft landing, characterized by an aggressive Federal Reserve tightening campaign in 1994 transitioning to a brief, mostly painless slowdown, followed by modest rate cuts, a productivity revival, and five years of outstanding stock market returns.

The ongoing dominance of a select few Nasdaq giants propelling the S&P 500 above 5000 echoes the central theme of the "1999 redux" proponents. Comparisons are drawn between today's steep surge in Nvidia and the trajectory of Cisco Systems in the late '90s, with charts circulating to illustrate these parallels. Notably, some argue that the extreme concentration of the S&P 500, where the top six stocks approach 30% of the total market value, surpasses the severity observed near the 1999-2000 peak, despite the slightly lower earnings contribution of these stocks to overall index profits today.

Concerns extend to the top-heavy nature of the S&P 500, attributed to passive flows into index funds and the tendency of active stock pickers to chase the largest stocks higher. This narrative mirrors complaints from 1999 about automatic flows into 401k plans and momentum-chasing mutual funds artificially inflating the value of big glamour stocks. A study by value-investing asset manager GMO reveals that the top ten S&P 500 stocks by size have consistently outperformed an equal-weighted pool of the other 490 in recent years, a departure from historical trends.

However, the comparison between 1999 and the present day faces challenges. Despite talk of a potential market bubble, the Nasdaq Composite has yet to reclaim its peak level from November 2021. In the 26 months leading up to December 31, 1999, the Nasdaq soared by 150%, whereas the Nasdaq 100, performing relatively better, is only 8% above its late-2021 high. Valuations today, while posing challenges, are not in the same stratosphere as they were in 1999. Furthermore, Microsoft, the largest stock by market cap in both December 1999 and the present, does not exhibit similar valuation extremes.

Discussions about the current market often reference the excesses of 1999, which led to a 75% Nasdaq crash and 13 years of the S&P 500 being stagnant. However, acknowledging that the current conditions differ from the largest bubble in anyone's lifetime doesn't imply a risk-free market with nothing but blue skies ahead.

Some proponents of the '1995 scenario' find encouragement in the Federal Reserve's response, drawing parallels between the 1994 tightening campaign and last year's mini-regional-bank crisis. The soft landing of 1995, following a mid-cycle slowdown, resulted in a stock market rally, echoing the recent economic phase. The historical analysis suggests that equity performance tends to be better in slow Fed easing cycles, especially in contrast to fast ones occurring in rapidly weakening economies.

Despite the potential echoes of both 1999 and 1995 in the current market, it's essential to note that broader market conditions were more modestly valued in 1995. Additionally, the belief in technological disruption and the aggressive capitalization of disruptors were only in their early stages during that period.

As the market continues to exhibit remarkable strength, with the S&P 500 showing resilience to a firm U.S. economy, improved corporate earnings, and relatively stable Treasury yields, the debate about the parallels with the 1990s remains a nuanced and evolving narrative. The market's current setup, marked by an impressive rally, broad-based performance, and occasional concerns about momentum stocks, adds complexity to the ongoing discussions. While the overall trajectory appears positive, the possibility of short-term corrections and the challenges of balancing multiple factors in the current market environment cannot be ignored. The market's resilience, coupled with tactical alarms triggered by certain sectors, makes the current landscape one to watch closely, with the potential for both continued vitality and near-term adjustments.

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Bryan Curtis
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Eric Ng
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John Liu
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Bryan Curtis
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