This Market Is Nothing Like The Late 1990s (Except For One Metric)

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by: Brian Gilmartin, CFA

Having lunch with a client yesterday in downtown Chicago, the discussion around the market was how today's S&P 500 action is nothing like the 1990s.

Bespoke noted this week that Tech's market cap weighting within the S&P 500 is 26% (which would be larger if Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) were moved from Consumer Discretionary to the Tech sector), which is the only real similarity to the late 1990s, and even then in March 2000, the Tech weighting as a percent of the S&P 500 peaked at 33%, still higher than today's weighting.

What's missing from today's market?

The brutal corrections.

  • 1995's roughly 35% S&P 500 return led by Microsoft (NASDAQ:MSFT), Netscape, AOL, etc., etc. was steadily higher all year, and then in the spring 1996, Tech saw a sharp selloff (from roughly 1,200 on the COMP down to 1,000 by mid-July '96) which ended with the Intel (NASDAQ:INTC) earnings report in July '96.
  • 1997 saw the real damage start to occur with the Thai Baht and Malaysian Ringgit devaluation in late July '97 which led to rolling currency devaluations throughout Southeast Asia in the last six months of 1997, resulting in a sharp correction in the S&P 500 in late 1997, ending in January '98.
  • In 1998, we saw the first of the banking crisis with Long-Term Capital Management's ill-advised positions, causing the S&P 500 to fall from 1,190 to 923 in a two-month span, only to see chairman Greenspan reduce the Fed funds rate in late Sept., early Oct. '97, which sent the S&P 500 rallying sharply into year-end 1998. The S&P 500 rallied 38% from its Sept. '97 lows to its Dec. '97 close - think about that.
  • In 1999 we saw a relatively flat market from March '99 through mid-Oct. '99 when the mother of all Nasdaq blowoffs occurred: the Nasdaq rallied from roughly 2,600 in mid-October '99 to 5,132 as of March-April 2000.

Today's market trades like it's on sedatives, which it may be after the 1990s and 2000s.

My favorite stat I talk with clients and prospects about when the opportunity arises is that for the five years from 1995 to 1999 (inclusive) the S&P 500's total return was roughly 125%. In other words, the S&P 500 "averaged" 25% a year for five years in a row. Think about how unusual that is...

The next decade from 2000 through 2009, the S&P 500 returned a cumulative 12.5% (or averaged roughly 1.25% per year for 10 years).

The source of these numbers is the former Ibbotson Stocks, Bonds, Bills and Inflation handbook which is no longer available and is now a part of Morningstar's Advisor package.

Thomson Reuters S&P 500 Earnings Update:

This Week in Earnings wasn't available, but the data has been pieced together from Thomson's Earnings Scorecard published this morning:

  • Fwd 4-qtr est: $168.39 vs. last week's $168.26
  • PE ratio: 16.6x
  • PEG ratio: 0.77x
  • S&P 500 earnings yield: 6.01% vs. last week's 6.01%
  • Year-over-year growth of fwd est: +21.48%

The year-over-year growth of the forward estimate peaked four weeks ago at 21.8% and hasn't made a new high since, although we need to give it a few more weeks to see what we can see.

The growth rate of the S&P 500 earnings will ultimately slow as we move into 2019 and we lap the corporate tax rate reduction for 2018.

Readers should expect that to happen.

There are a couple things happening with the data, but the trends aren't long enough yet to be conclusive.

The S&P 500 closed last week at 2,801, and this week at 2,801. It continues to hold 2,800 - a good sign.

The 10-year Treasury yield finally jumped this week from 2.83% to 2.89%.

Next Friday, July 27th, we see the first look at Q2 '18 GDP (advance GDP) - that will be an important number for the bond market.

Stay tuned - more to come over the weekend.

Thanks for reading.