Comstock Partners, Inc.
2004 Looks a Lot Like 2000
June 29, 2004
The current condition of the stock market bears many similarities to that of the last presidential election year in 2000. The S&P 500 trading pattern in both years followed bubble-type environments including overvaluation, record consumer debt, large trade deficits and massive equity mutual fund purchases. To that list we can now add a serious housing bubble.
The S&P 500 peaked early in the year 2000 and then fluctuated sharply until finally breaking down in September. So far we have been witnessing a similar pattern as the S&P 500 peaked in March at 1163 and has been fluctuating ever since (see attached chart from Big Charts). If the S&P 500 continues to follow the year 2000 pattern, a major breakdown of that index could be close at hand.
The outrageous economic and financial bubble of the late 1990s will probably not be repeated for many years to come as the S&P 500’s PE multiple exceeded prior market peaks by over 50% and the PE of the NASDAQ Composite was off the charts at 245 times earnings. However, with that said, the year-long 50% rally that peaked in March appears to be a mini-version of the surge in the late 1990s as the lowest priced and lowest quality stocks were by far the best performers. In fact, the highest PE stocks did exceptionally well while the stocks that had no earnings did even better. We believe that 2003-2004 rally was a counter-trend move in a secular bear market similar to the big rallies of the Japanese Nikkei Average while it was headed down about 80 percent in a 13-year period.
Although the excessive overvaluation experienced after the financial mania of the late 1990s may not be exceeded for a long time, as we stated above, the overvaluation was far from fully corrected in the bear market of 2000-2002. And with the rally of 2003, the market valuation parameters have just returned to the valuation levels reached at historical market peaks prior to 2000. To see these various metrics please click on “Limbo, Limbo, How Low Can It Go?” on our home page.
The excess consumer debt has been discussed so much on our web site we don’t have to go into further detail, but suffice it to say that the debt build-up in the financial mania of the 1990s only got worse during the latest recession and bear market. In fact, it was the only recession on record where consumer debt did not decline.
Since the public always buys “what they just missed”, equity mutual fund inflows of $309 billion in 2000 exceeded the 1997 record by $87 billion. This year we were on track to exceed the $309 billion record in mid-March when the S&P 500 peaked at 1163. In fact, inflows were $43 billion in January and $26 billion in February. Estimated inflows were heavy in the first half of March and looked as if it would exceed the January number, but abruptly changed to outflows when the market began to pull back. After the huge downturn in the 2000-2002 bear market the public apparently learned to play the market as long as it was rising, but to get out quickly if stocks started to decline. In the end, March ended up with net equity fund inflows of $16 billion. With April inflows coming in at $23 billion and May being flat, one can see the rate of gain for the first 3 and 4 months of this year were on track to exceed the 2000 record.
All in all, current comparisons to the year 2000 are eerily similar on a number of key parameters and if this continues, it doesn’t bode well for the rest of this year or 2005.
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