Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Are The Markets Heading Back To The 1990s and Hammer Time?

Published 03/26/2014, 02:07 AM
Updated 07/09/2023, 06:31 AM

Everything Old Is New Again
S&P 500 Monthly, 1995-2014

In a 1991 episode of Seinfeld, as Kramer pleaded with Jerry to install illegal cable he uttered:

Man, it’s the 90s. It’s Hammer Time!

Some analysts on Wall Street are drawing similarities to between today's markets and the 1990s, a period marked by extraordinary returns in the stock market and M.C. Hammer’s moment in the sun. From Bloomberg Business Week:

Early in 1992, Time magazine projected that the nascent economic recovery would be “one of the slowest in history and the next decade one of lowered expectations.” That was the conventional wisdom and, at the time, seemed eminently reasonable. It also turned out to be completely wrong. The Internet and huge productivity gains propelled above-average economic growth and a rip-roaring, “Cult of Equity” bull market that surged into the year 2000.

In a recent research note, Schwab’s Liz Ann Sonders pointed out numerous similarities between today’s market environment and the mid-1990s, including:

  1. Post-financial crisis period (S&L crisis then, housing crisis now)

  2. Slow, “jobless” economic recovery

  3. Similar stage within economic cycle

  4. Extremely easy monetary policy, but “normalization” beginning

  5. Low inflation

  6. Today’s eurozone = 1990s Japan

  7. Government shutdowns (1995-1996 and 2013)

  8. Midterm election year (1994 and 2014)

  9. Rapidly improving federal budget deficit

  10. Minimum wage hike

  11. Technology revolution

  12. Rising valuations from depressed levels

  13. US market outperforming emerging markets

  14. Record-high margin debt levels

  15. Rising volatility

  16. Increasing equity mutual fund inflows

The Glass Is Half Full

In recent weeks, we have outlined our present day concerns about an indecisive and increasingly vulnerable stock market. In today’s analysis, we will assume the 1990 similarities are relevant.

Can we find evidence to support the possibility of better than expected stock returns in the next 3-5 years? As we have noted in the past, markets are a polling mechanism. When the aggregate response to the future economic outcomes poll is bullish, stocks tend to rise. Conversely, when the aggregate response is bearish, stocks tend to fall. Therefore, we learned something about the health of the economy when the S&P 500 failed to make a new high in 2000 near point A in the chart below. The reversal near a similar point in October 2007 (see A1 below) foreshadowed economic trouble. With the S&P 500 plowing through the previous points of selling resistance, the right side of the chart paints a much more optimistic view of future economic outcomes. Therefore, it is possible to find some present day evidence to align with the “Hammer Time” theory.

SPX Weekly 1997-2014

Investment Implications – Keep All Scenarios On The Table

Should we invest based on a 1990s analogy? No, but the analogy helps us keep an open mind about better than expected outcomes in the stock market over the next few years, which is just as important as keeping an open mind relative to worse than expected outcomes. Markets are complex systems with countless moving parts. As outlined in The Best 2014 Investment Advice, we can increase our odds of success by leveraging the concepts described by John Henry of John W. Henry & Company:

“If you take emotion - would be, could be, should be - out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.”

What “is” at the present time? We have a bullish, yet more vulnerable, profile for equities. As long as the S&P 500 holds support near 1,844 and the 50-day reflects a bullish economic bias (see chart), we will continue to err on the side of holding U.S. stocks (SPY), rather than more conservative assets, such as bonds (iShares Core Total US Bond Market (ARCA:AGG)) or currencies (PowerShares Dollar Bullish USD Index Bullish (UUP)). Since flexibility is a core tenet of success, we will monitor the incoming data and adjust as needed.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.