Are We In A Replay of the 1990’s Internet Bubble? | Stock Talk Podcast
Chris Perras: Viewers I get it, everyone wants to call a top, everyone wants to gain a reputation and earn some street credibility. What better way for someone to gain fame and bring in assets or maybe it’s to sell more newsletter subscriptions, what better way than to call for a major market top well in advance? I get it. Careers can be made by getting one negative call right or even close to right.
The credibility of being a one-hit or two-hit wonder can be tremendous. Look no further than legendary investor Jeremy Grantham of GMO who granted, was correct and early to call the Japanese stock market bubble but is being quoted still 12 years into the current secular bull market saying since 2010 the market was overvalued and a bubble was going to burst. If you followed his advice you’ve missed out on roughly 15% compounded stock returns for the last 12 years.
He’s got credibility with the TV press because he did call the bubble top early and correctly on Japanese equities 30 plus years ago. Yes, he will eventually be right and we’ll have another lost decade in equities. All of you have lost the last 12 years following his [unintelligible 00:01:15] advice was 12 years loss of substantial positive returns. Viewers, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group.
Back on Friday, March 11th, with the S&P 500 trading at roughly 4,185 and many on TV calling for new lows in the S&P 500, and others redefining the term bear market, our investment team released a podcast titled Early Optimism: Three Signs of Bottoms, Lows, and Pivots. As a quick refresher, these three signs we covered were, one, investor sentiment being overly negative, two, market breadth, or the number of green stocks markedly outweighing the number of red stocks on your screen.
Third and finally, forward volatility markets in the Term Structure of Vol. Since that day, the cash S&P has rallied almost 8% in a straight line over only 10 trading days. The bears are back out en masse. Instead of saying, “Oops, I was wrong.” They’re lobbying out new comparisons about time periods, it sounds spooky to some and terrifying to others. It’s a replay of the 1920s say some. No, it’s the 1930s, tout the other group of hedge fund managers.
With inflation running hot, some strategists are out there swearing it’s the 1970s all over again. Finally, with tech stocks having swooned for the better part of the last 12 to 15 months, a great deal of bear calls are breaking it out as it’s the late 1990s internet bubble popping all over again playbook. Last week we gave you the real data behind that ominous Death Cross Chart Pattern the bear camp was talking about which didn’t seem to work out very well for them.
This week, I want to take a look at the bearish internet bubble comparison. Viewers, for all the talk of the internet bubble, few in the industry have a comprehensive real-life view of that time period from a market and tech stock perspective as I do. This may sound arrogant to some but those of you who know me and know my bio know what I speak of. A quick bio refresher.
See back in 1997, myself and two other analysts were hired by one of the all-time great guys, Garrett Van Wagoner to come to San Francisco and be his analysts and junior portfolio managers on a series of high growth mainly technology stock mutual funds. At the time there was no Cathy Wood or Ark Investments. There was no marketing spend bundled into the ETF marketing blitz around investing in innovation.
No there was Janus, there was Munder, there was Amerindo and there was an upstart Van Wagoner Capital Management. At the time, Garrett launched his fund company with the unheard-of $1 billion in inflows. Back in 1997 my then wife Kim and I moved to San Francisco to work for a technology growth legend in a very entrepreneurial group in a small office space in downtown San Francisco.
It was fun and exciting, the people were amazing, the opportunity was huge and it was just an amazing time. Viewers, I get to sit with Jeff Bezos with a group of only four people in a tiny windowless office as he described the IPO launch of Amazon to us. We had almost then unrivaled access to leading technology companies and pre-IPO startups which our mutual funds invested in and wasn’t fast-paced and sexy and fun until the summer of 1998 hit.
Russia defaulted on its debt, long-term capital blew up, the S&P 500 fell about 17%, the NASDAQ composite fell 25% to 30% and hyper-growth stocks we owned fell -35%, -50%, and even -75% in about three months. Our assets declined from about $1 billion in AUM to under $400 million, and many of us were worried for our jobs. Hell, we had all just moved to San Francisco for this opportunity that seemed as if it was vaporizing before it even started.
Then, miraculously, the Russian crisis did not end the world, the long-term capital hedge fund default didn’t blow up the economy, and the overall S&P 500 bottomed amongst all the bad news and it, technology stocks and energy stocks, went on to make substantial new and major all-time highs in the next 9 to 12 months. You see, viewers, the internet bubble was really a two-part episode. It was a trade that lasted longer and went higher than many may remember. With all the calls for the current market looking like that time period, Cathie Wood’s fund, The Ark ETF dropped over 65%, peak to trough, the bubble has popped, yes?
Russia’s about to default on its debt, and has invaded Ukraine, right? Sounds familiar to 1998. Now, I’m sure there are many commodity funds that have blown up recently, with the moves in oil and nickel. Maybe there are a few long-term capitals that we don’t know about that will be announced after the books close at the end of the first quarter.
With all of the same anecdotal analogies out there, I decided to go back in time and review my charts on what the market looked like during the internet bubble, which those who lived through it day by day remember. It did not end quietly. The fact is, viewers, from a chart perspective and an event-history perspective, it does look a lot like the internet bubble. However, what those storytellers aren’t telling you is that if it is the internet bubble round two, they are likely too early calling it, and in the process of being run over by the start of the final 9 to 15 months up-leg in that move.
Here’s my first chart. It’s the monthly chart of the NASDAQ Composite. It’s largely large-cap technology stocks. The names have changed since the 1990s, but here’s the chart of the index. One will see that from the pivot in 1992 through the summer peak in 1998, this index gained a cumulative 268.5% over 70 months before peaking and declining in a correction, for about three months.
Fast forward to this cycle. In taking the pivot as early 2016, one will see that over the exact same subsequent 70 months, the NASDAQ Composite returned a cumulative 267.5% before succumbing to its current three-month correction. 70 months, the exact same period of timeframe, and a 1% cumulative return difference. That’s an amazing coincidence, if it is one, by any standard.
Here’s the monthly chart of the S&P 500 over the last 30 years. It looks exactly the same as the pullback in the summer of 1998, currently. Of course, the ultimate top in both the markets and technology was not made for another 15 to 18 months, in early 2000. Maybe some technical will say, “Okay, you win on that one, Chris. The S&P 500 chart looks like there’s still room to run if we’re comparing it to the 1990s’ internet bubble.”
Many bearish analysts will break out with statements like, “Clearly, the market is overvalued on the Shiller [unintelligible 00:08:18] PE,” that almost no one uses, or, “As a multiple of GDP.” Which only someone like Warren Buffett, who has a constant source of incoming cash, can use. Neither tech stocks nor the S&P 500 can withstand higher long-term interest rates or a flat or flattening yield curve.
Hmm, I guess these guys on TV never get fact-checked, or if you disagree with them, you never get invited back onto TV. The data says this is flat-out misinformation. Yes, you heard that correctly. The stock market can, and has in the past withstood both rising long-term interest rates as well as a flattening or flat yield curve and, yes, this includes the epic run that tech stocks and the S&P 500 had in the fourth quarter of 1998 through early 2000.
Here’s a chart of 10-year treasury yields during the late 1990s. As you can see, the 10-year treasury yield went from 4.25% to 6.75% over 15 months, rising over 2.5%, as the S&P 500 and tech stocks did what? They rocketed higher to new all-time highs. “Well, how about the yield curve?”, you ask. Surely, back during the go-go internet buildout years, the yield curve was steepening then, with all the spending on infrastructure, with all the excitement over future growth prospects and all?
Well, the answer is no. As this chart shows, back then, the yield curve had flattened to about zero over the prior two years, from about 100 basis points. Does that sound familiar? It then proceeded to bounce around at about a steepness of zero to about 45 basis points for the entire move up in tech stocks, and the S&P 500 from the late 1998 through early 2000 or about 15 months. Viewers I walk you through this rebuttal of this market currently being a replay of the internet bubble not because I’m totally confident it isn’t, no I’m not nor I am sure of the market’s forward path, even though the overall S&P 500 continues to adhere to its normal first quarter second presidential year path.
I do this because and I want to educate you, that while things may feel unprecedented and many bearish individuals always seem to have great arguments of the market doom. It’s hard to call overall market tops consistently and accurately. Maybe the bears will eventually be proven right comparing this time period to the internet bubble in 1997 through 2000. Maybe they are finally right and we’ve already been past the cycle top for the overall tech stops in the market.
However, my analysis of that comparison says that they’re likely both early and wrong, and with the market having experienced its first -10% correction since 2020, the overall bull market is still intact. While we continue to expect more volatility in the second and third quarters, the market is likely to resume its upward path later in the year and make new all time highs.
At Oak Harvest, we think our clients are best served by us helping them with our future needs and risks. Instead of focusing on the past or another over-hyped, often wrong, technical timing tool. Our crystal ball is far from perfect, however we do like to keep you up on what it’s saying about the uncertain future, not about what we already know about a certain past. Whether we are a replay of the 1990s internet bubble or not. We’re a comprehensive financial planning advisor located here in Houston Texas.
Give us a call to speak to one of our advisors and let us help you craft a financial plan to meet your retirement goals and needs first and your grade second. Give us a call here at 877-896-040. We’re here to help you on your financial journey into and through your retirement years. I’m Chris Perras and from everyone here at Oak Harvest, have a great weekend.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.