Party Like It's 1995 Or The 35% Year

by: Tom Bergerson

I chuckled the other day watching Fast Money Half-Time with Laszlo Birinyi walking back an earlier call to see the S&P500 at 2800 and that he would not take a 35% up-year like 1995 off the table.

How did the S&P500 perform in 1995? The S&P500 closed at 459.27 on 12/30/1994. The S&P500 closed at 615.93 on 12/29/1995. That was a gain of 34.11%.

Consider what was happening in 1995. The end of 1994, beginning of 1995 represented the Great Inflection Point in stocks (see below). What caused the inflection? The most obvious reason was that the Republicans took the House of Representatives for the first time in something like 2 generations in November 1994 which you can see IS the inflection point. Newt Gingrich, yeah that Newt Gingrich, threw a spanner in Clinton's works with the Contract With America. This set the stage for bending the growth of government down and the primary surplus that happened a few years later in the US budget.

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At least as important, 1995 was the year that Microsoft (NASDAQ:MSFT) brought multitasking computing to the desktop and the backoffice with Windows 95 and had recently revamped Windows NT. And more important than that, 1995 marked the year when ordinary people could actually start using the internet and when Netscape and Yahoo (NASDAQ:YHOO) were hatched. These things led to an actual leap in productivity and also instilled the wild animal spirits that ignited the .com bubble (note the uptrend in the 1990s and the sideways to down trend since the early naughts in the BLS graph of productivity below).

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In the 1990s there was yet more going right for the US. Computing power was increasing in accordance with Moore's Law and Intel (NASDAQ:INTC) was printing money. The Uruguay round of GATT had recently been completed and set the stage for a long period of outsourcing and labor market rationalization worldwide. Oil prices oscillated between $18 and $21/bbl! We were still looking at the great rise of indebtedness that would lift total debt to GDP over 350% by 2007 (see

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The Soviet Union had collapsed and the Berlin Wall torn down just a few years prior and so military spending decreased. Inflation was in the process of being slayed or "opportunistically disinflated". The world was moving right politically, embracing market economics and the Anglo-Saxon model. The mantra of the day was to minimize the footprint of government, embraced even by Clinton. Demographically, babies were still being born in developed countries and there were many workers supporting each retiree in the pension systems of the West and in Japan.

In short the economy and the market were supported almost entirely by tailwinds and faced few if any headwinds.

Fast forward to today. Does anyone think animal spirits are flowing in abundance? Is there any technology on the horizon that would greatly improve productivity?

In contrast to 1995, the economy and the market face almost all headwinds today rather than the dawning of a new golden age.

No global trade agreement has been done since the Uruguay round. The great rationalization of labor costs has basically run its course and labor costs in China are now rising fast, slowly erasing the delta that made outsourcing such an important phenomenon. Microsoft is a shadow of its former self. Windows 8 is a disaster. It actually decreases productivity rather than enhancing it. The rise of computing power has stalled; Moore's Law a dead letter. Oil is around $100/bbl. Politically the world has moved viciously left in the west and Latin America while turning (Russia) or remaining (China) viciously authoritarian in the East. Rather than being on the upswing in the debt creation cycle, we are on a plateau or a downswing with total debt still around 350% of output and flattening or outright deleveraging ahead (see Yardeni/Fed Flow of Funds debt chart above). America has re-elected a guy who actually believes that the government is the wellspring of prosperity and that those who have built the prosperity in this country did not really build it. Demographically, developed countries have more or less stopped having babies and in the US immigration is a dirty word.

In short, we face many headwinds and benefit from few tailwinds.

To Birinyi's credit, he says in the video clips above that we are in the late stages of the bull market that began in March 2009. His thesis is that you can get blowoff type gains in the terminal stage of such a market. And with the Fed throwing down the gauntlet "printing" money with no temporal limit and about to apparently be outdone by the BoJ, there will be a great deal of money sloshing around to float markets nominally higher. But one must worry that such throwing caution to the wind will likely create the crisis of confidence the Fed seeks so desperately to avoid.

For the real economy, its lifeblood constricted by the sclerosis of too much debt and too much government, the S&P500 reaching 2800 or having a 35% year would seem like a strangely anomalous divergence. It could happen but somehow I doubt it. It seems more likely at 46 months and counting we may be partying as we were in very late stages of the bull market like 1999 or 2000 rather than the beginning stages as we were in 1995.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long VIXG13 and VIXH13