No one on the street would confuse today’s bull market in stocks with the zeitgeist-driving one that ripped through the 1990s. Business magazines no longer resemble phone books. Hotel rooftops aren’t being annexed for balance sheet-burning launch parties. But there are increasingly parallels.
According to Bloomberg’s Whitney Kisling, the Standard & Poor’s 500 Index has gained 26.2 percent annually, including dividends, since its March 2009 crisis low—just as it did during the last 50 months of the late 1990s technology bubble. U.S. corporate profits have gained 20 percent a year since 2009, twice their pace during the dot-com advance. The $784.5 billion earned by S&P 500 companies in the last 12 months compares with $431.3 billion in 2000 and $255.7 billion in 1996. And are you hearing about all these initial public offerings?
Of course, turn-of-the-century mania led to a spectacular crash that started a lost decade for stocks, culminating in an epic financial crisis. That scarring psychological low point is what today’s market must still deal with. The past seven years have seen $1.4 trillion of inflows to bond funds and $0.9 trillion in redemptions from equity funds, according to data from EPFR Global.
It’s noteworthy that the phrase melt-up is again being bandied about. The term, which refers to accelerating equity price gains, was the subject of a May 10 note by Michael Harnett of Bank of America Merrill Lynch called ”Raging Bull.” ”The risk of a melt-up in stocks,” he wrote, “is high and rising. Positioning, price-action, policy and a range-bound economy can conspire to cause an overshoot. Where’s that correction?” He notes that investors waiting for that pullback have been disappointed as the S&P 500—up 21 percent over the past year—keeps setting new records. Hartnett says that a risk of this melt-up-like action from the market is that it could invite “jawboning from the Federal Reserve,” which has injected $2.3 trillion of stimulus into the economy and kept its benchmark rate near zero percent. Between 1999 and 2000, by comparison, the Fed hiked rates six times, taking its target rate to 6.5 percent.
Another great voice in the melt-up discussion is Michael Santoli of Yahoo! Finance, who wrote last week: “One under-appreciated element of both 1995 and 2013 (to date) is how each represented a great unclenching of bound-up financial and economic anxiety. Wall Street had essentially undergone two crashes (one of stocks, the other bonds) within seven years. Risk-taking had been forcibly curtailed. … Washington was a snake pit, warring over budget and social issues, and Congressional Republicans would shut down the government in late ’95. Entering 2013, financial players had endured a serious meltdown scare either from Europe or Washington for three straight years, and in general investors were defensive, hedged, positioned to expect continued volatility. In both cases, the Street was not in a posture to profit from an ‘outbreak of calm’ in either the economy or policy, and markets re-priced higher than seemed warranted at first.”
While Santoli stressed that the analogy only goes so far—unemployment is now higher; we’re coming off an economic collapse and not a mild recession—1995 did see the S&P 500 return an otherworldly 34 percent en route to nosebleed (fatal, it turned out) valuations for growth-at-any-price tech companies. Unlike that market, this one has seen defensive shares (soap, food) post their best start in more than two decades. So investors are still showing some caution, suggesting more gains may lie ahead.