News & Insights
“Party Like It’s 1999”
In the run-up to the turn of the century, pop artist and philosopher Prince released a popular song that summed up the mood of the times. “Party Like It’s 1999” was a catchy tune from the 80’s that anticipated celebrating good times of the late 90’s. Investors were feeling pretty good during the late 90’s era as well. The stock market seemed to levitate upward for years and any hint of caution or prudence was dismissed. The investment “hangover” did not begin in earnest until March of the year 2000 when the tech bubble finally popped and a serious bear market took hold. The factors leading to the sell-off were in plain sight, but in the main, investors were captured by the strong upward trend and became even more enthusiastic as prices rose; meanwhile simple logic tells us all that higher prices make an investment less, not more, attractive.
We think that smart investors will consider the parallels between then and now and we are not alone. Market gurus as diverse as the bullish David Tepper of Appaloosa Management and Jeremy Grantham of the staid Boston investment house GMO Investments speak of 2015 as if it will be like the fabulous “overshoot” year that birthed the 2000 bear market.
As support, we first cite valuation. By almost all metrics, the market is more than fully priced unless you believe in perpetually easy monetary policy and extended zero percent interest rates. As we have stated before, a lot of money can be made in the final overvalued stages of a bull market, but without the underpinning of value the risk of a reversal is greater.
Secondly, high levels of speculation are measurable as investors borrow money on margin to buy shares at levels not seen even before the 2008 and 2000 market reversals. Corporate profit margins, fattened by cheap borrowing to historic levels are bound to revert toward normal at some time. In short, earnings growth is more likely to disappoint than pleasantly surprise us.
Mark Twain once said “History doesn’t repeat itself, but it rhymes.” And we do not believe that we are destined to repeat the past. There was money to be made in 1999 and many of the risks that were present then are less of a factor in 2015, but experience tells us that taking some profits at this stage of the bull market is advisable. That said, stock markets are confounding creatures and the tendency is for higher prices unless recession or monetary tightening interrupt the party. This leads us to a conservative but not dramatically underweight position against our benchmark stock weightings for U.S. stocks.
International stock markets offer better value and investments made today in both developed and emerging markets should produce good long-term results, but patience will be required as economic weakness and policy uncertainty keep values down.
Bonds continue to offer poor value but play an important role in managing risk. As 2014 ends we should celebrate good times (subtle Kool and the Gang reference), book some profits and look forward with optimism but be a little better prepared for air-pockets we may encounter en-route to 2016.
The Altavista Investment Team – Winter 2015