The bull market of the 1990s was the longest and strongest market surge in recent history, but it started out in a semi-catatonic stupor during the first half of the 1990s. The market seemed asleep for the first four years of that bull market. The ceiling seemed to be set in solid concrete, at about 3700 on the Dow.
There was such low volatility in those years that the Dow never moved 100 or more points in a day for over four years (i.e., over 1000 trading days), spanning November 15, 1991, through December 18, 1995.
On December 13, 1994, the Dow stood at 3715. Then - in a flash - the market soared. The Dow, S&P 500, and Russell 1000 tripled within five years, and the tech-heavy Nasdaq grew five-fold in five years.
Bear in mind that these gains did not come from some artificial low. At the end of 1994, the bull market was over four years old and was up over 60% from its October 1990 lows. Like today, there was plenty to worry about, but the market took off anyway. This brings to mind a delightful question to ponder over the July 4th break: Is it "morning again in America"? Could the market be poised for more mega-gains?
What Happened in 1994 - vs. Similar Events in 2013?
Recently, long-term Treasury rates have soared, bringing back memories of 1994. From a base of 5.6% on January 12, 1994, the 10-Year Treasury bond rate rose 245 basis points in 10 months, reaching 8.05% in November. But unlike today's Fed - which seems fixated on maintaining zero-percent short-term rates - the Alan Greenspan Fed of 1994 raised rates six times, fighting phantom inflation fears all year long.
The benchmark "Fed Funds" target rate was a comfortably stable 3% from September 4, 1992, to February 4, 1994, but over the next year, the Fed doubled the cost of borrowing - from 3% to 6%. First, it raised the Fed Funds rate in three baby (quarter-point) steps, then in two larger (half-point) strides, and finally a leap of 0.75%, from 4.75% to 5.50% on November 15, 1994 - then, a final bump to 6% on February 1, 1995.
Whatever the reason for the Fed's paranoia, these moves triggered a massive exodus from bond funds into cash - not stocks. This money was on the sidelines for at least six months before the stock market surged.
Once again, we've seen a panic exit from bond funds in the last month, but we don't yet see a great rotation into stocks. Instead, some global stock markets are in free-fall. The MSCI Emerging Markets Index is down 14.5% for the year through June 26, according to the latest issue of The Economist. The once-vaunted BRIC nations are faring the worst. Brazil is down 27.9%, Russia is off 17.4%, India is off 13.6%, and China is down 12.9% so far in 2013. Most of these declines have come during May and June, when bond prices were also collapsing, so any great rotation - so far - looks more like a global yard sale.
As in 1994, the seemingly inevitable "great rotation" is taking its sweet time. Bond yields rose in 1994, but stocks didn't start rising until 1995. This time around, the 10-year Treasury rate is just starting to rise, from 1.6% on May 2, to a recent peak of 2.67% on June 26. However, like 1994, there is no big rally in stocks taking place.
Also like today (and always), the stock market was transfixed by its Wall of Worry. Some of those worries sound quite familiar: 1) A fear of the national takeover of healthcare via "Hillary Care" in 1994, vs. the coming implementation of Obamacare in 2014; 2) sovereign debt crises, like the bankruptcy of Orange County (California) and the Mexican peso crisis - both striking in December 1994 - vs. today's fears over Greece; and 3) fears of job losses to foreign workers - based on NAFTA in 1994, and China now.
In Late 1994, Two External Events Jump-Started Stocks
On November 8, 1994, a seismic event took place in Washington, DC, when Republicans won the House of Representatives for the first time in 40 years. This "Republican Revolution" split the reins of government between Democratic President Clinton and an opposing but remarkably activist Congress, which passed its self-styled "Contract with America" within 100 days of taking office in early 1995.
Stocks tend to rise the most when one party runs the White House and the other runs Congress (call it "Gridlock"), so the market liked this political turn of events. From a low of 3674.63 in November 1994, the Dow soared 36% in the next year, closing above 5000 for the first time on November 21, 1995.
The second big event didn't seem so big at the time: On Tuesday, December 13, 1994 (when the Dow was still mired at 3715), the first World Wide Web consortium took place at the Massachusetts Institute of Technology [MIT]. This ad-hoc gathering was called to promote protocols for the World Wide Web.
In between these two big events came two headline-grabbing financial crises - the devaluation of the Mexican peso (December 1) and the Orange County bankruptcy (December 6). Even though those events kept traders on pins and needles, the advent of free trade (NAFTA) eventually solved the peso crisis, and the birth of the Internet led to new efficiencies in communication and commerce by the end of the 1990s.
Back in 1994, I remember two particular investment conferences where I served as emcee. In June, Swiss seminar sponsor John Dessauer shocked his audience by revealing his June 1994 cover story: "Dow 5000 by the end of 1995." Nobody believed it then (including me), but it happened. By contrast, in the fall, New Orleans investment conference speakers were quoting from a best-selling book, Bankruptcy 1995, all about the coming crash of 1995, which didn't happen. Instead, America had budget surpluses by 1999.
Today, we see the same negativism, led by David Stockman's new 768-page best-seller, "The Great Deformation," which sees "an era of zero-sum austerity and virulent political conflict, extinguishing even today's feeble remnants of economic growth." But we also see some of 1994's same positive signs: A split government - Democratic President Obama fighting a Republican Congress - and amazing new energy technologies that could deliver us from the Middle Eastern energy despots within five years or so.
These two building blocks may be enough to kick-start the stock market into overdrive, but we must also look to the "mother's milk" of any bull market in stocks, i.e., the outlook for future corporate earnings.
Rising Earnings: The Vital Ingredient for the Next Mega-Bull Market
Rising corporate earnings give us hope for a continuation of the current bull market. Estimated S&P 500 forward earnings are now at a record high of about $117 per share, up from $113 at the end of 2012. Industry analysts are currently estimating $123.65 for 2014, pointing to an S&P of 1855 at a 15 P/E.
But what if the U.S. market earns a higher P/E (around 18), befitting its role as the clear global leader, the world's only superpower? Maybe the China threat is over-rated and the U.S. is under-rated in the race for global dominance. Back in April, economist Ed Yardeni wrote in a note to clients, "My theory is that the U.S. may be going back to the future as investors around the world start to see similarities between the current decade and the 1990s. Back then, the U.S. was the sole superpower. The U.S. economy was widely admired.... While there are lots of significant differences between now and then, the U.S. once again looks to be the best place for global investors looking for opportunities to get a decent relative return." In addition, he writes, "Given the turmoil in Europe, the Middle East, and Asia, the U.S. also looks like a safe haven."
Another vital ingredient of today's market is the coming shortage of shares due to corporate buybacks. In the past four quarters, total buybacks and dividends for the S&P 500 companies alone have totaled $702 billion. Since the bull market began in early 2009, share buybacks and paybacks have topped $2.3 trillion.
There are no guarantees, of course, but 2013 might mark the start of this bull market's "second wind."
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