Investors/traders keep comparing the U.S. stock market in 2017 to 1997, 1998, 1999, or 2000. We think that’s the wrong comparison. The stock market today is much more similar to the late 1960s (1966-1968).
*A bear market began in December 1968.
Differences between today and the late-1990s.
There are a couple of glaring differences between today and 1998/1999.
For starters, valuations are much lower today than they were in the late 1990s. As you can see in the S&P’s 12 month trailing P/E ratio, valuations today are much lower than they were in 1999. (22.8 vs 34)
*P/E ratios can spike during bear markets because earnings/profits fall much faster than stock prices.
The 1990s was a pure bubble. Everyone was talking about “a New Economy” in which profits didn’t matter and the future of the economy would be rosy for decades. According to mainstream thinking at the time, stock prices would remain permanently elevated at a plateau.
There is no such optimism today. College grads are still worried about finding jobs, wage growth is low, and aside from a few high-flying tech stocks, no one is talking about a “new economy”. The media is calling “it’s a bear market!” and every dip, and perma-bear sites like Zerohedge are frequented by many investors/traders.
The Fed is on a once-a-quarter rate hike path, and will do so as long as this economic expansion continues. The Fed practically kept interest rates flat throughout the second half of the 1990s.
No fiscal stimulus
The U.S. government didn’t implement any major fiscal stimulus packages under Clinton’s 2nd term.
Arguably, Trump will still be able to pass some water-downed version of his pro-growth policies.
The stock market’s rallies aren’t as strong.
- The stock market gained 11% in 2014, -1% in 2015, and 9% in 2016. Year-to-date, the S&P is up 9%.
- By comparison, the S&P was up 34% in 1995, 20% in 1996, 31% in 1997, 26% in 1998, and 19% in 1999.
Hence, you can see why there is no “euphoria” in the stock market today.
Mainstream financial media loves to sensationalize charts. They manipulate axis on charts to create scary-looking rallies. Here’s a clearly misleading chart that was created by CNBC:
As you can see, the axis are completely different!
Similarities between today and the 1960s (1966-1968)
The present-day stock market is much more similar to the late-1960s.
In the 1960s, the S&P’s peak P/E ratio was 22.6. Today, the S&P’s P/E ratio is 22.8.
Interest rates are on the rise because the Federal Reserve is on a non-stop rate hike path. The Fed will likely remain on this path for at least 1-2 more years. Likewise, the Fed hiked rates throughout the late 1960s.
Even if the Fed doesn’t hike rates later this year and sells down its bond portfolio, doing so is akin to rate hikes. Selling bonds puts upwards pressure on rates.
Economy will hit NAIRU in 2018
At the current pace of economic expansion, the U.S. unemployment rate will hit 3.7% by summer 2018. The unemployment rate will be lower than it was during the late-1990s. The unemployment rate is currently at 4.4%, and we still have half of 2017 left.
Trump’s pro-growth policies
Arguably, Trump will still pace some water-downed pro-growth policies (tax cuts, infrastructure spending).
President Johnson made a big fiscal push as well during the 1960s.
- In February 1964, Johnson pushed through Congress the late-Kennedy’s tax cuts. Income tax rates fell 20% across the board.
- Johnson then followed up with the “War on Poverty”. This was the Food Stamp Act of 1964, Elementary & Secondary Education Act of 1965, and Social Security Act of 1965 (created Medicare and Medicaid).
Even if Trump passes nothing, we think China will implement a fiscal stimulus package in late-2017 or early-2018. As we mentioned in a previous post:
Our sister fund thinks that this catalyst will be a Chinese fiscal/monetary push in late-2017. After 5 years of internal political maneuvers, Chinese President Xi Jinping has finally gained complete political control in China. Based on our contacts in Beijing, President Xi will make a big effort to push the Chinese stock market/economy higher after the Communist party’s October 2017 congress.
We live in a world that’s more connected than ever. A foreign economic expansion will only benefit the U.S.
The bottom line is simple. Based on our medium-long term model, the current bull market and economic expansion have approximately 2-3 years left.