2024 is showing increasing parallels to 2000, right before the Tech Bubble busted. Bubbles almost always grow larger than most could anticipate, and there is always a story to seemingly justify them, as there is with AI today. When they pop, they pop violently as was seen when the Tech Bubble collapsed, leading to an 80% peak to trough loss on the Nasdaq. Imagine a 50% decline in your portfolio, let alone 80%. I believe the current bubble is quite large and dangerous, which is why we are far more conservatively positioned, taking advantage of the extremely attractive valuations in areas such as bonds, REITs, and value stocks. A very low risk 8%, is much more attractive than a potential 20% return with 50%-60% downside, especially when we are talking about retirement funds. When valuations are more attractive, absolutely it makes sense to get more aggressive.
Here are a few data points that are eerily similar to previous stock bubbles, particularly, the Tech Bubble of the late 1990s. For instance, relative to the S&P 500, the S&P 500 Momentum Index has surged to a new cycle high and is at its highest since August of 2000. The ratio of US Large Caps to US Small Caps is at its highest level since October 1999. The ratio of Growth Stocks to Value Stocks in the US is at its highest level since March 2000, the peak of the dot-com bubble. Small cap stocks are being outperformed by large caps by the most since 1998. Millennials and Gen Z are 90% invested in stocks in their 401ks, based on Vanguard’s defined contribution plans. The S&P 500 made a new all-time closing high on Friday with just 43% of components above their 50-day moving average. In the past 25 years, the only other time we’ve seen an all-time high with less than 45% above their DMA’s was December 1999. The S&P Expanded Tech Forward P/E is almost as high as it was in 2021, when interest rates were near 0%. This makes absolutely no sense whatsoever as higher interest rates, reduce valuations for long duration assets such as Tech stocks, because the opportunity cost becomes dramatically higher. Keep in mind that the Nasdaq dropped by 30% in 2022, when valuations were similar.
Here is a poignant quote from John Hussman:
“Even glamour companies of the tech bubble that prospered from a growth perspective lost value from an investment perspective. from their 1999-2000 speculative highs to their 2007 bull market peaks (entirely excluding the global financial crisis that followed), Amazon enjoyed compound annual growth approaching 40%, Microsoft enjoyed revenue growth averaging 14% annually, and Cisco Systems enjoyed revenue growth averaging 22% annually. During that same period, all of these stocks posted negative cumulative returns, with Amazon losing 5.5%, Microsoft losing 20.3% and Cisco losing 57.4%. Be careful about extrapolation once extrapolation has already produced extraordinary valuations.”
It is really easy to see how a lost decade can once again occur for stocks, given the current valuations and the market concentration that we are seeing. It really would only take Nvidia, Apple, Amazon, Tesla, Meta, Microsoft, Costco, and Alphabet mean reverting towards more normalized valuations. I mean Costco trades at 53 times earnings and Apple is at one of its highest valuations ever, despite fairly mundane growth prospects. Mean reversion occurring doesn’t seem too unlikely in our estimation, which is why we find other opportunities more attractive. Real estate seemed like a no-brainer investment in 2004-2007, only to lead to the biggest real estate crash since the Great Depression. The Nifty Fifty was the same in the 1970’s. Bubbles are built on speculative behavior getting rewarded, as we have seen from valuations continuing to grow to increasingly higher levels, further away from historical averages. These are times when patience and discipline are more important than ever. In investing you have to run your own race. When a distance runner, tries to keep up with a sprinter, they are bound to tire themselves out, as that is not their game. Similarly, those that are trying to compress 40 years of investment returns, into 5 years through speculating in the bubble and using leverage through options, are unlikely to hold on to their gains when the bubble bursts.