It’s 1998 all over again, only my carpenter jeans no longer fit, I can’t find my Chumbawamba CD single, and my kids think that Scary Spice is just a talent show judge. Even the best of pop culture in 1998 was sending an ominous sign. Titanic won best picture. Semisonic’s “Closing Time” spent weeks in the Billboard Top 10. Maybe, in hindsight, 1998’s pop culture was trying to tell us something. After all, it was only 16 months later that the tech bubble hit the iceberg and the elongated U.S. equity bear market commenced. As Semisonic sang, “You don’t have to go home, but you can’t stay here.”
I’m not the first person to note the eerie comparisons between 1998 and the current environment. It’s the three key differences, however, that are more noteworthy.
1. Growth Is Stronger Today
Then: By this point in 1998, global growth, amid the Asian foreign currency crisis, had slowed massively. Real global growth of 2.2% for the year was the seventh weakest of any year since 1969, and the only year in the top nine not associated with a recession.
Now: Global growth is relatively sound, albeit slowing. For comparison’s sake, the International Monetary Fund (IMF) estimates that the global economy will grow 3.8% in 2018. Growth may not be robust, but it is sufficient to support corporate earnings.
2. Rates, Policy and Inflation Are No Cause for Alarm
Then: In 1998, U.S. Treasury rates plunged as the dollar spiked and the rate of inflation declined. The Alan Greenspan-led Federal Reserve (Fed) responded to the Asian currency crisis, the fear of worldwide recession, and the collapse of the Long-Term Capital Management hedge fund by lowering the Funds rate three times in the back half of 1998. Asset prices soared and by the next year the Fed had reversed course. By early 2000, the Fed had inverted the yield curve. Did the Fed err by lowering rates in 1998 and fostering an asset bubble? Was Fed policy too tight in 1999 and 2000? Either way, market cycles end, as always, with a policy mistake.
Now: This year, U.S. Treasury rates have climbed as average hourly earnings growth have risen to the highest level since before the 2008 crisis. The Jerome Powell-led Fed raised rates in March, June, and September and is poised to do so again in December. The Fed, thus far, is proceeding at a measured pace. Importantly, the Fed continues to have the flexibility to back down from its tightening stance if necessary, as its preferred measure of inflation, the core personal consumption expenditures (PCE), has only just reached 2% for the first time in years. If anything, a more modest global growth environment in the coming years points to a “Goldilocks” environment for rates and inflation – neither too low, nor too high, but “just right.” In our view, that means the cycle will last longer than many people suspect.
3. Better Valuations and Fewer Signs of an Overheated Market
Then: By October 1998, the average price-to-sales ratio of the top 5 Nasdaq names was in double digits on its way to 16x by December 1999. The top 5 stock positions in the Nasdaq—Intel, Cisco, Microsoft, Oracle, EMC—had posted cumulative gains of 439% off the June 1992 bottom.
Now: Currently, the average price-to-sales ratio of the top 5 Nasdaq names is 5.7x. The so-called FAANG stocks—Facebook, Amazon, Apple, Netflix, and Google—have posted cumulative gains of 163% since June 2012.
What’s an Investor to Think?
Market Seems to Have Plenty of Room to Run: The upshot is that this cycle with sound growth, relatively benign inflation, and reasonable valuations likely has more than the one year and four months left in its run that the 1998 market did.
Long-Term Investors Did Well Even Through the Tech Wreck: For long-term investors, what is more important is that from October 1998 until today—a period in the United States that includes the tech wreck, the 2008 Global Financial Crisis, and an elongated secular bear market—U.S. equities have returned a modest but nonetheless respectable 6.75%. If we apply the rule of 72 [divide that number by our expected return to determine how long it will take to double one’s money], that is a doubling every 10.6 years. With apologies to Semisonic, you could have stayed there. Semisonic was right, however, that you didn’t have to go home. Emerging market equities, as represented by the MSCI Emerging Markets Index, have returned 9.20% per year over the past 20 years.
Patience and Persistence Usually Pay Off: Staying in the market hasn’t been easy over the past two decades. As we deal with the current volatility in the markets, I defer to the pleadings of Titanic’s Jack: “Promise me…that you won’t give up, no matter what happens.”