Dotcom Bust vs. Pandemic "Bust"...equities and rates

[tede02]

Out of curiosity I charted the S&P500 during the tech bust along with short treasurys and Fed Funds. Very different market response compared to 2022/2023. What's striking to me is the S&P500 essentially declined pretty consistently from late 2000 through late 2002 despite the Fed cutting rates all the way through this period. Contrast that to the last year or so. Although the Fed has been raising rates to the point of material real yield, not only has the S&P500 rallied, market multiples also appear to be expanding. It's just fascinating to me because the situation is very counter to conventional thought and consensus. This game never ceases to amaze me. 

 

 

Edited July 13, 2023 by tede02
typo

[Parsad]

Inflation was not a problem in 2000 when the dot-com bust happened.  You also had a correction in the broad market, but many value stocks actually did well like BRK, KO, etc that had become undervalued relative to the broad market. 

 

What actually would be more comparable to the last 12 months is 1999 to early 2000 when rates rose relatively dramatically and tech stocks grew into a massive bubble.  Sound familiar?

 

Cheers!

[tede02]

10 hours ago, Parsad said:

Inflation was not a problem in 2000 when the dot-com bust happened.  You also had a correction in the broad market, but many value stocks actually did well like BRK, KO, etc that had become undervalued relative to the broad market. 

 

What actually would be more comparable to the last 12 months is 1999 to early 2000 when rates rose relatively dramatically and tech stocks grew into a massive bubble.  Sound familiar?

 

Cheers!

 

It's a good point on the 1999 comparison and inflation being a different factor. There are always so many factors at play. It's tempting but over-simplified to look at one variable, like interest rates, in isolation. 

[Parsad]

4 hours ago, tede02 said:

 

It's a good point on the 1999 comparison and inflation being a different factor. There are always so many factors at play. It's tempting but over-simplified to look at one variable, like interest rates, in isolation. 

 

What do they say...history doesn't repeat, but it does rhyme!  

 

This whole setup is starting to look familiar to 2000.  Now let's see what happens.  Cheers!

[rkbabang]

3 hours ago, Parsad said:

 

What do they say...history doesn't repeat, but it does rhyme!  

 

This whole setup is starting to look familiar to 2000.  Now let's see what happens.  Cheers!

 

 

When you see large tech companies trading at multiples of 500-1500 let me know.  Things are getting a little expensive, but it doesn't look like 2000 to me.  If there is a crash I don't think we will see anything like major companies going down 80-95%.  I know there are a handful of stocks with crazy valuations (TSLA), but nothing like 2000.

 

[Parsad]

5 hours ago, rkbabang said:

 

 

When you see large tech companies trading at multiples of 500-1500 let me know.  Things are getting a little expensive, but it doesn't look like 2000 to me.  If there is a crash I don't think we will see anything like major companies going down 80-95%.  I know there are a handful of stocks with crazy valuations (TSLA), but nothing like 2000.

 

 

Didn't say it was as expensive as 2000.  Just that tech stocks were greatly overvalued and you've had 10+ consecutive increases in interest rates.  I can easily see a 30-40% correction.  Cheers!

[changegonnacome]

32 minutes ago, Parsad said:

I can easily see a 30-40% correction

 

Plenty of names that could correct by this much for sure.....I agree.....and only then would they be reasonably or just expensively priced..........I think what's becoming clear for sure.....is the lack of breath right now.........we all know the stats....the magnificent 8 etc etc delivering all the gains for 23......the FOMO trade is seeing a little more participation creep into things......but the FOMO trade/expandign breath trade is disappointedly (if your waiting for next bull market) into kind of meme things....the magnificent 8, meme stocks & crypto things are rallying......doesn't feel like the start of new bull market to me......feels like the middle of the end of the last one.

 

You could make a crazy argument for TSLA at this valuation.......when the 10yr was 0.6% two years ago ........but with the 10y at ~4%........there is a very strong argument to say TSLA is more overvalued now with the updated discount rate than it was at the height of the COVID bubble.

 

What lies ahead regardless of what the stock market is doing (it isn't the economy) - remains further tightening, cause inflation remains about 250% above target using the Fed's preferred measure......followed by continued deterioration of the economy in the face of this....there is an interesting factor with the CPI coming down as it has recently.....is the FF for the first time in how long??? a decade plus? Is firmly into real positive territory versus the CPI......200bps if you want to use the 3% headline number...

 

 

History and common sense shows - that a deeply positive real FF rate (~2.5%+) is followed invariably by an economic downturn (recession)...back to the source of funds to spend in the real economy common sense argument......credit becomes unattractive...it impacts credit fueled spending....supporting the marginal employee...you know what happens next.......you'll see in the chart above seen as you mention dotcom.....that in the late 90's that rule was kind of broken....real FF moved into 2.5%++ territory around 1996-97 but the dotcom bubble it seems (wealth effects? famous Greenspan put) kept the economy levitating longer than history suggested it should with such a high real FF rate.........the other thing of note where the rule is slightly violated is where there was no inflationary backdrop....and you can see the Fed cutting rates in the chart and prolonging the expansion in these period 80's, 90's......problem now is the inflationary backdrop.....cutting too early is the sin JP is looking out for (correctly)......he's not looking to prolong this cycle...he's looking in some respects to end it.....this cycle zoomed out in the future will look like the late 50's, late 60's, mid-70's hiking begetting recessions....will be interesting to come back to this thread later on with the chart above in 2025..............with the exception of 2009......there really hasn't been one of these in 40yrs.......cause starting in 1981......bonds yields fell in an almost perfectly straight line for 40yrs with almost perfectly compliant inflationary backdrop (globalization/disinflation/china & eastern europe labor....disinflationary tech advances contributing.).......no wonder lots of market participants can't fathom what's gonna happen next and are bidding things to da moon.....they weren't around in the 50's, 60's or 70's......when the Fed last had an inflationary backdrop twinned with a hiking cycle/overheating economy....it just hasn't happened since then.

 

One thing you cant deny is its great entertainment.......if your sick puppy and into this sort of thing  

[ValueArb]

I first started value investing in 2000, the returns were so extraordinary the next six years that I fear I will never see them again.

[mattee2264]

 

 

 

 

 

 

The best correlation is actually between Big Tech and inflation.  CPI inflation fell from a peak of 9.1% to the current level of 3.1% and over the same time duration Big Tech roughly doubled recovering the majority of its earlier losses from the inflation shock.  

 

And essentially Big Tech investors are frontrunning interest rate cuts they see coming.

Also when sentiment is still bullish equities with their theoretically unlimited upside will always seem more attractive than bonds even if the latter offer a much better current income. 

 

 

While last summer/autumn should have been a reminder that stock prices can go down as well as up instead it reinforced the lesson that every dip is a buying opportunity and any losses are quickly recovered if you hold on which again gives equities seemingly attractive option value (heads you win big tails you don't lose much (or at least not for long). 

 

And unlike dot com bust earnings haven't fallen off a cliff and with AI in prospect investors can assume that the stalling of earnings growth or modest declines represents a lull and can look through to an economic recovery and an AI boom..

What might ruin this pretty story is a stagflationary recession that ties the Fed's hands and results in a meaningful decline in corporate earnings the market finds hard to ignore and brings into question their rosy future assumptions and brings into  play a higher for longer narrativev that probably will require an adjustment to valuations 

 

 

 

 

 

 

 

 

 

[Spooky]

Something has to break, either it is the Fed cutting rates or parts of the stock market.... seems to me if the Fed needs to chose between fighting inflation and GDP growth they will choose inflation as the scarier problem.

 

Also, it seems to me that the real winner from the development of AI tools will be businesses across all industries that can use them to be more productive not just technology stocks. The technology / algorithms for these models are open source for god's sake...