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Stock Market Growth Today Resembles Y2K's Surge - and It Didn't End Well

February 9, 2024
minute read


The early indications from Friday's stock-index futures trading suggest that the S&P 500 is poised to open the session above the significant 5,000 mark. Breaching and subsequently closing above such major round numbers in equity indices tends to fuel optimism among investors, who hope that the previously perceived resistance can transform into support. This phenomenon often prompts reflections on historical patterns, as analysts seek clues from the past to anticipate future developments.

Julian Emanuel, a strategist at Evercore ISI, draws parallels between the current market and the Y2K stock market surge of the late 1990s. However, he acknowledges the conventional wisdom that history seldom repeats exactly but often exhibits rhyming patterns. Emanuel notes the unyielding momentum that has propelled the S&P 500 to the 5,000 level, comparing it to the internet-fueled rally from the October 1998 market bottom to the pivotal October 2022 low.

The Y2K phenomenon during the dot-com boom saw technology stocks receiving an extra boost, driven by expectations that companies would invest significantly to ensure their computer systems could transition smoothly into the new millennium. Emanuel raises the question of whether a similar frenzy exists today, particularly in relation to artificial intelligence (AI).

While Emanuel identifies similarities between the current market and the late 1990s, he also highlights key differences. Present valuations, though stretched at 22 times trailing twelve-month earnings, are still lower than the 28 times seen during the Y2K/dot-com bubble peak. Moreover, indicators like weekly initial jobless benefit claims and consumer confidence data do not currently signal significant stress, unlike the period preceding the 2001 recession.

Despite these differences, Emanuel expresses concern about the parallels between then and now. He emphasizes the price parallels, positive sentiment around the long-term potential of generative AI, and investors' newfound confidence in stock market returns, reminiscent of the late 1990s. Emanuel warns that such conditions expose equities to risks related to inflation, earnings, and Federal Reserve policy disappointments.

Emanuel maintains a cautious stance, favoring defensive sectors such as communications services, consumer staples, and healthcare. He reiterates a year-end S&P 500 price target of 4,750, suggesting a preference for sectors that historically outperform during the period from the Fed's last interest rate hike to the first rate cut.

In the broader market, U.S. stock-index futures were firmer on Friday as benchmark Treasury yields declined. The U.S. dollar showed little change, while oil prices dipped and gold traded around $2,030 an ounce.

The buzz in the market includes a revision to the U.S. consumer price index, Dallas Fed President Lorie Logan's scheduled speech, and significant premarket moves for companies reporting after Thursday's close. Positive news from Cloudflare led to a 25% increase in its stock, while companies like Expedia, Affirm, and Pinterest experienced declines.

The chart presented by Paul Ciana, technical strategist at BofA Securities, delves into the January effect for the 10-year Treasury yield. Analyzing data since 1963, the chart indicates that when the benchmark yield is up in January, the trend from February through year-end tends to be higher 61% of the time, with an average increase of +81 basis points.

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