The stock market today is NOT like 1999 or 2007


Bears love comparing the U.S. stock market today to that of 1999 and 2007 (when the last 2 bull markets peaked). It scares the crap out of investors. They say that 2017 is similar to 1999 and 2007 in the following ways. I’ll show you why 2017 (and probably 2018) is different.

1999

  1. The Fed was hiking interest rates due to inflation fears.
  2. Economic growth was improving.
  3. U.S. corporate earnings were rising via share buybacks and M&A sprees (reducing the # of publicly floated shares, thereby increase Earnings-Per-Share).
  4. Margin debt (leverage) was at a record.
  5. The stock market was going parabolic.
  6. Speculation: internet stocks

2007

  1. The Fed was hiking interest rates due to inflation fears.
  2. Economic growth was improving. (This is false. The U.S. economy was deteriorating).
  3. U.S. corporate earnings were rising via share buybacks and M&A sprees (reducing the # of publicly floated shares, thereby increase Earnings-Per-Share).
  4. Margin debt (leverage) was at a record.
  5. The stock market was going parabolic. (This is false. The stock market was vey choppy in 2007. Hardly parabolic).
  6. Speculation: housing

Today

Point #1: The Fed is indeed hiking interest rates today. But rate hikes DO NOT kill bull markets. The Fed hikes interest rates all the time. Few of these rate hike cycles result in bear markets like 1999 and 2007.

In addition, we are still early in the rate hike cycle. For comparison, the Fed hiked interest rates 17 times from 2004-2006. The Fed has hiked rates 5 times in the current rate hike cycle. Over the past 60 years, the lowest effective Federal Funds Rate when the economy went into recession is 3%. The effective Federal Funds rate is currently 1.4%.
In other words, rate hikes can’t hurt the U.S. economy yet.

The stock market usually rises when interest rates rise. This is because interest rates rise when the economy is growing nicely! An improving economy = bullish for stock market in the long term.
Point #2: This is supposed to be bearish? Give me a break. Improving economic growth is BULLISH. If improving economic growth is bearish, then what’s deteriorating economic growth? Bearish as well? If that were the case, then the stock market will fall forever and ever.
In addition, the real U.S. economy was deteriorating significantly in 2007. Nominal GDP growth was ok because inflation was rising. So from an economic standpoint, 2007 was much worse than the present.
U.S. economic growth is solid today. No signs of deterioration.
Point #3: Most of earnings growth in 2018 won’t come from share buybacks. It’ll come from the Republican tax cut. Without the tax cut, earnings growth for 2018 is estimated to be 6%. With the tax cut, earnings growth is estimated to be 13%! That’s more than double.
Point #4: Yes, margin debt is indeed going up. But margin debt is a pretty useless indicator. As the stock market goes up, margin debt will ALWAYS be going up because the value of the stock market increases! Investors will ALWAYS pile on more leverage as long as the stock market goes up.
Point #5: The stock market did not go parabolic in 2017. The stock market went up 20%. A 20% annual gain is rather common! Hardly parabolic.
Point #6: A Bitcoin crash will not impact the U.S. stock market like internet stocks did in 2000 or housing did in 2007. Crypto is TINY. It’s a $500 billion market. The S&P 500’s capitalization alone is $22 trillion.

2 comments add yours

  1. The only thing that worries me about point #6, a potential bitcoin crash, is the amount of people who’ve mortgaged their homes to buy into the bitcoin market. Hopefully it’s a lot less people than the internet makes it seem.

    • I think so. The Bitcoin market is much smaller than tech stocks at the time (when adjusted for inflation).
      In addition, the majority of Bitcoin’s volume comes from outside the U.S. So the majority of losses will be absorbed by foreigners. In 1999 the majority of tech investors were American. In 2007 the majority of mortgage holders were Americans. The majority of losses in 1999 and 2007 were absorbed by Americans.

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