Murphy’s Law. That axiom about history repeating itself. Anxiety over the stock market rocketing too high. All of these things may be on investors’ minds these days, but why?
We are in the midst of a tremendously good stock market run. As of mid-November 2017, we have seen gains of 15% for the S&P 500, 26% for the NASDAQ, and over 18% for the Dow Jones Industrial Average.
The lingering question “Is the bull run about to end?” persists as most investors still remember the crippling years of the Great Recession and the lesson that all good things come to an end. Which further begs the question, could we be headed for a tech-induced crash and relive the 1999-created bear market all over again?
As a refresher, 1999 was a year when market expectations became dangerously imbalanced. For the nine years previous, stocks enjoyed a massive string of gains. Between the years 1991 and 1999, markets were up over 190%, with an average annual gain of 21%. The numbers show us that stocks were up 30% in 1991, then 37% in 1995, and 23% in 1996. And this wasn’t a snapback from a market low like we saw in 2009; the 1980s were solid years for overall stock performance as well.
In 1999, the numbers were so good that investors seemed to forget about the dark side of markets. Technology was a boon for stocks. Optimism ran rampant – people fired their stockbrokers for only being up 20%; e-trade babies were buying private islands; cardiologists were day trading in between surgeries. It was a wild party that raged on until the record skipped. Greed and expectations got the better of people. And then the tech bubble burst.
We moved from free frolic to free fall and true days of reckoning. The S&P 500 dropped by almost 50%, but even more dramatically, the NASDAQ, heavily laden with tech, went from over 5000 to only 1100. That’s an over 75% drop. What’s worse is that the market didn’t rebound quickly; it took almost a full decade to clean up the mess from the party of 1999.
Since the market rehabilitation year of 2009, the NASDAQ is now up over 400%. Herein is the reason for investor anxiety. Sometimes we do learn from history, and it’s natural to have anxiety that lingers from past market mayhem. And in the world we live in there are always threats to the economy and market.
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Today, let’s address four of these main issues, or pillars, that I have identified in the fearful minds of investors, or the stock market’s Wall of Worry.
1. FANG Fear – Are the Big Five of Facebook, Apple, Amazon, Netflix, and Google (or “FANG”) setting us up for another tech bubble burst?
2. The Age of the Bull – Isn’t this bull market getting old, and shouldn’t there be a correction lurking just around the corner?
3. A Divided Washington – Isn’t the political climate more unstable than ever, with political infighting, a seeming revolving door at the White House, and a constant twitter storm?
4. Interest Rate Spike – What about interest rates? If they go higher, won’t they spoil the stew?
Let’s take a closer look at these pillars and see whether they merit so much concern.
FANG Fear
FANG is really Facebook, Apple, Amazon, Netflix, and Google, but it could also include Microsoft since this sister tech company is up almost 30% year-to-date.
Since March of 2017, the FANG group has broken trend to the upside. While the S&P 500 was up about 9% during this time, the FANG group was collectively up about 28%. But this tech run looks very different from that of 1999.
Back in 1999 and early 2000, leadership was very narrow – the top 10 stocks were driving everyone else in a disproportionate way. And it was significant; the disproportionate drive was to the tune of 28% of the returns. Look at the drivers, and we see that 2% of the market was behind that 28%.
If we wonder if this type of market behavior is normal, we can look to history for insight. The last 50 years tell us that number should be closer to 22%, and they tell us it’s true that the big boys in the S&P 500 typically pull a lot of weight.
Today, that concentration is below normal. We’re at under 20%, so we’re a long way from where we were in 1999, when leadership was much more top heavy, at close to 30%.
For even more perspective, let’s look at the top five stocks in December of 1999. Microsoft, over 4% of the market, was up 28% in just one month. GE, almost 4%, was up 19%. Cisco Systems was up 20%. Oracle, almost 1% of S&P 500, went up an astounding 65% in that same month. And let’s not forget about Qualcomm, which skyrocketed 84% in December.
Fast-forward to today, and we see that, despite the run FANG has had, it’s nowhere near the excess of 1999. In September of this year, Apple was up 10%, Intel was up 19%, Amazon was up 15%, and if we look at Microsoft too, we see that it was up 12%. These were the biggest contributors for September, and even though these are some of the market cap leaders, the returns are nothing like what we had as the 1990s drew to a close.
The lesson here is that FANG isn’t as fatal a risk as we may fear. It is true that the biggest handful of stocks can, and have many times in the past, created a top-heavy market environment, and that can be dangerous and lead to a tumble. But that’s simply not where we are today.
The Age of the Bull
Another common pillar in the Wall of Worry is the topic of whether our bull market is getting old. Folks want to know if, at some point, we must have a correction for the bull to stay healthy. And, yes, it’s been placid several months. Since the election, we’ve only seen a correction of slightly less than 3%.
But, it’s not as if we haven’t had a pullback since the bull run started in 2009. Remember 2011? We dropped 20% from April to October of 2011. That was 20% within the day, and 19.6% on a closing basis, meaning the history books say it doesn’t count. I say that’s ridiculous.
It was a bear market, and we had a US credit downgrade and the European debt crisis. Plus, we had to wait all the way until July of 2012 for Mario Draghi to say the European Central Bank was ready to do whatever it took to preserve the euro.
In 2011, between April and October, we saw a correction of 19.6% with the US debt downgrade. Then, from May of 2015 to February of 2016, the S&P 500 fell 14%. True, these were recognized as fairly significant corrections these times, but still we didn’t enter an official bear market.
Of course, we will have another 10% correction, and we will have another bear market (or 20% or greater correction). But, it remains unlikely that a bear is in the cards anytime soon.
To experience a bear market in stocks, the economy is often (but not always) headed into recession. And a recession doesn’t seem to be around the corner today. Instead, 91% of manufacturing around the world is expanding. We would have a long way to go to get to contraction territory. In short, a bear will come, but our current bull isn’t as old as he’s painted out to be.
A Divided Washington and Tax Reform Limbo
I don’t believe things in Washington are as far gone as most. Yes, attempts at reforming health care have failed. But, our policymakers seem to be gaining in traction on tax reform. Here’s a recap of things from Capitol Hill that may have an impact on the market, and some things that probably won’t.
1. There have been almost 2500 tweets from President Trump since the election. During the same time, the maximum correction in the S&P 500 has been 2.8%. Clearly, his 140 character commentaries (at least so far) aren’t contributing to or creating market mayhem.
2. The name of the game is tax reform. The House did pass their version of tax reform just this past week. And, there’s a chance (a chance) that the Senate could try to reconcile, conference and vote before the Alabama Senate special election on Dec 12th. Why is this important? Because the GOP believes that no matter who wins the Alabama election, that person won’t be a vote for the tax bill. Right now, it’s an all-out race to get the legislation to vote before the special election happens.
Remember, corporate tax cuts typically add between 7% and 14% to S&P 500 profits. That’s a giant number. Even if reform doesn’t come to fruition this year, that doesn’t mean we won’t see it in early 2018.
Interest Rate Spike
Here’s a simple, straightforward forecast on this one. Remember that stock prices don’t begin to get hurt by bond yields until the 10-Year Treasury rate is at 4.5% or more. Today we are still under 2.5%, meaning we have a very long way to go.
The Bottom Line on the Pillars in the Wall of Worry
There’s always something to worry about as an investor. Plenty, really. The list may seem never-ending and in a constant state of flux. Add that in with the fact that you’re human, and you feel real anxiety over potentially losing half your money and living through another recession, and what you have is a constant drain on your psyche. You also have the recipe for markets. Here, your stability, optimism, and patience are your biggest allies.
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