Is This Party Like 1999?                

(Today’s Theme Music: The artist formerly known as “the artist formerly known as” Prince.)

We have previously noted, most recently last week, that there seemed to be a generational difference of opinion among investors.  Those who went through the internet bubble are more likely to ask me whether the current market runup is reminiscent of that era.  Those who are younger – particularly those who began investing after the Global Financial Crisis (GFC) – are far less apt to raise concerns of that type.  That does not preclude the latter group from asking why the former might be expressing concerns.  Today’s piece hopes to reconcile those views.

Let me preface this by noting that both attitudes – both nervous and sincerely skeptical about that nervousness – are equally valid.  Let’s also stipulate that while “this time it’s different” is often considered the most dangerous phrase in investing, it can be equally perilous to draw inappropriate parallels.  Hopefully it is easier to try to answer this question: why do people compare today’s market to that of 1999-2000?

1. The rush to build out data centers is reminiscent of that era’s rush to build out bandwidth.  We can stipulate that artificial intelligence has the potential to be as transformative as the internet was.  It is also true that huge investments in bandwidth were required to allow us all to connect to the internet.  Then like now, some of the most profitable, cash-generating companies were paying for this investment.  Indeed, the “baby bells” and others were not nearly as profitable as the current hyperscalers, but then again, the bandwidth investments pale in comparison to those of current data center plans.  Remember, it was only recently that Cisco (CSCO) and current darling Intel (INTC) surpassed their bubble-era highs
2. Linear and/or parabolic moves are inherently unstable.  This is not specific to either period.  It can apply to the recent run-up in precious metals too.  But it is difficult for some to refrain from getting a bit of vertigo when they see moves of this type:

6-Months, NDX (red/green candles), SPX (blue line)

Source: Interactive Brokers

6-Months, NDX (red/green candles), SPX (blue line), SOX (purple line)

Source: Interactive Brokers

It is understandable why seeing a 70% rally in SOX in under six weeks might cause some to consider whether we have come too far too fast, especially when memories of the following chart are etched in some older folks’ minds.

NDX Index, Jan 1, 1999 to May 11, 2000, with 50-day moving average

Source: Bloomberg

The rally in NDX from October 1999 to March 2000 surpassed the current 70% mark.  If we take the starting point at around 2400, the first 70% gain was at about 4000.  There was another 20% left to run.   But the current SOX and historic NDX seem at least similar.

• There was massive monetary stimulus in late 1999.  Huge concerns about Y2K disruptions led the Federal Reserve to flood the system with liquidity before the calendar turned.  This rally is occurring without help from the Fed.  During the course of this rally, we have seen rate cut expectations plummet from 2-3 for 2026 to none.  On the plus side, we have seen earnings performance act as a catalyst for this move.  Many of the guidance boosts from affected companies were for the next quarter or two, though analysts and investors are extrapolating them into the foreseeable future.  But see Item #1 – that might not be as sustainable as hoped
• Heavy speculation, then as now.  In those days, investors raced into the market, in many cases using their new internet connections to buy stocks.  Lately we have seen that focus shift to options, with the industry routinely setting new volume records, powered by call option buying. 
• Age. The current bull market is about 3.5 years old.  The internet-era bull run lasted about 4 years.

My conclusion.  History doesn’t repeat but it often rhymes.  Like most hit songs, including Prince’s, I hear quite a bit of rhyming, if not repetition.

Bear in mind that Prince actually had one of the most prescient market calls of all time:

Say say two thousand zero zero party over, oops, out of time
So tonight I’m gonna party like it’s nineteen ninety-nine

OK, so that call was at least 17 years too early.  The album “1999” was released in October 1982, just two months after the start of a great bull market.  But stock traders did party in 1999 and then oops, out of time.  What a party it was.  And then, as now, it’s impossible to know when it might end and how bad the hangover might be.