Traders holding again the brand new market 12 months see similarities with the 2010 restoration and 1999 danger
A sports utility vehicle (SUV) from Kia Motors Corp. delivers the New Year’s Eve numbers “2021” on Monday, December 21, 2020 during a coast-to-coast tour of Times Square in New York, USA.
Michael Nagle | Bloomberg | Getty Images
After the calendar has turned, so many questions revolve around – including the year that has just started.
Which year or which years from the past, that is, have the greatest relevance for the current market and the current economy. Before the objections are uncorked: of course there are no exact repetitions of history, and the key for tomorrow is not in a musty archive.
However, each year contains its own mix of previous patterns that we interpret as cycles and convert into probabilities of future outcomes. There are always rough precedents, even for periods that feel completely unprecedented.
With that in mind, 2021 begins as an obvious mix of 2010 (early cycle recovery), 1999 (late cycle risk attack) and – a much less discussed predecessor – the early 1940s. (There is another narrative in the air of a Roaring replay of the 1920s. That will be a topic for another time, but it seems like a desirable hot take as well as a considered analogy.)
A war story
Before we get to the newer historical touchpoints, a word on the market and World War II political background to shed light on the strong run of the market amid the dire global coronavirus experience.
During the war, when the government posted record deficits to fund the military effort, the Fed and Treasury Department kept government bond yields low for the short to long term to fuel demand for record debt and keep the yield curve positively sloping . Today’s isn’t exactly the same, but his promise to keep short rates at zero and buy bonds until full employment and higher inflation are achieved serves a similar purpose.
And then there is the behavior of the market. The United States had little military success in the first few months after entering the war. Everyone knew it was going to be a dauntingly long, unsafe, and painful ordeal. But as soon as the US had its first military success in the Pacific in 1942, the market hit a decisive low point and went almost straight – even if most of the war and losses and costs lay ahead of us.
One can imagine the equivalent of bloggers and tweeters who were alarmed at the time to find Wall Street appeared alarmingly untouched by the realities on the ground, as we’ve heard since March 2020.
Echoes from 2010
The closest resemblance to 2010 is in the market action itself. A sharp move higher after a panic sell-off in March, followed by an unusually broad and sustained rally that treated investors as fragile, premature or misguided for months.
Nicholas Colas, Co-Founder of DataTrek Research, comments, “As of March 9, 2009 lows for US stocks, lows on March 23, 2009 [in 2020] with regard to the assessment of the investors about their environment as “highest unreliability”. In both cases, fiscal and monetary policy worked to restore market confidence. “
Many Wall Street handicappers have noted the synchronicity between the 2020 stock advance and 2009 – and, in large part, the pivotal 1982 rally that sparked the biggest bull market of all time.
There are also macroeconomic echoes: the typical increase in the early cycle is rising due to, for example, heavily negative production indices, corporate earnings and consumer confidence.
The overwhelming responses from the central bank and public finances are similar. In any case, the actions of the Federal Reserve (then quantitative easing, a promise of large adjustment, so far explicit inflation targets are met) were new and awe-inspiring.
The Fed’s stance and message to asset markets is likely more supportive now than it was in 2010. In early 2010, the Fed closed the first quarter, at which point investors were expecting rates to “normalize” fairly soon. As the graph above shows, the market got choppy and corrected in early 2010 as it digested the massive ramp from the lows.
Is the current position of the Fed “zero rates for years” more credible and lasting?
After all, liquidity is not an amount of a substance called money, nor is it the nominal size of the Fed’s balance sheet or bank reserves; Liquidity is a promise that is believed. In this case, it is the promise of simple terms until unemployment drops sharply and inflation rises above 2% for a while. Perhaps investor belief in that promise will be tested as the economy and markets get much hotter?
Other possibilities, which differ today from 2010, speak against a clean repetition. The downturn in 2020, unlike 2007-2009, was not a difficult 18-month calculation that cost the stock market half its value, threatened the financial system itself, and created dangerous imbalances in credit markets and household finances for years.
It was a mandatory shutdown, a flash recession, with a rapid, fear-driven market collapse, halted by massive, proactive policies that left the overall consumer balance in good shape, with spending held and additional savings of more than 1 Trillion USD.
The 2009 rally brought the S&P 500 back to levels reached almost 12 years ago, while the 2020 rebound resulted in record highs in just a few months. Credit spreads improved tremendously by the end of 2009, but were still well above their pre-Great Recession highs. Credit conditions are even better today than they were before the Covid shock, leaving less room for further improvement to further support stock valuations.
And as for the reviews …
’99 in mind
For the past several months, investment professionals have found it hard to resist comparisons with the feverish market boom in the late 1990s that culminated in a vertical “collapse” in technology stocks that have capped the indices for more than a dozen years. Understandably.
The S&P 500’s price-to-earnings ratio of more than 22 today is its highest since 2000 but is slightly below its peak P / E of nearly 26. Yes, bond yields are far lower today, quoting Fed Chairman Jerome Powell as saying that fact to say stocks are not worryingly overvalued now.
Lower returns, while explaining higher valuations, do not increase the return on assets, and 22x earnings is probably not a good starting point for delicious long-term gains, such as the 18 percent total return that S&P has been posting since March 9, 2009 Unless – and this is not impossible – the old investment math is currently being revised.
The atmosphere is what the bubble callers wielded over 1999 similaires. The rush of IPOs whose price is rising, the rush of new smartphone investors chasing price and ignoring traditional valuation, Tesla’s entry into the S&P 500 in a way reminiscent of Yahoo’s inclusion in late 1999.
The Ark Innovation ETF can represent the Janus 20 fund in the late 1990s – a concentrated portfolio that is perfectly aligned with the technological advances and market themes of the time, with excellent performance resulting in massive inflows that keep its stocks high for even longer drift as it takes.
Most of the action rhymes with the 1999 melody, but it didn’t last that long, gotten quite as extreme, or become so ubiquitous. Non-tech growth stocks aren’t as expensive now as they were then. And this market has shown a knack for draining some of the wilder subsectors while continuing to support the broader market.
In the late 1990s, the really massive promise of new technology was also discounted, moving technology from a sector that was always traded at a discount due to cyclicality to a sector that was valued at a sustained premium. In other words, much of the excitement was well founded but it was carried to indiscriminate extremes. And even then, the fun didn’t stop until the Fed started tightening aggressively in 2000.
The result: 2021 offers investors a cocktail of recovery forces and early cycle political inputs with late cycle assessment and risk appetite. It could be a kick.