A Walk Back through Time (2000-2021)

I've been thinking about how this bubble will play out and while history doesn't repeat, it does rhyme.  As the years go by, the more I realize that you can't lose the forest for the trees.  One can get so caught up in the day to day news flow and price action, and miss the big picture.  Let's look at the current market and compare it to the past from the perspective of 5 big picture items:  1. Monetary and fiscal policy  2. Macroeconomic fundamentals ex. goverment policy  3.  Stock market valuations 4. Bond yields  5. Investor psychology and behavior 

I know some people will disagree that this is a stock market bubble, but I assume most readers of this blog will agree that its either a bubble or a very richly valued market.  So with that bubble assumption, let's go from 2000 to 2021, to compare the situation at the start of that year versus now (Advantage = more bullish in that year.) 

2019-2021: Not too many similarities there.  

2018:   

1. Powell was more hawkish then than he will be in 2022.  Fiscal policy was also loose in 2018 with the Trump tax cuts and now with all the residual savings from the bazooka Covid pork barrel in 2020 and 2021, and probably Build Pork Bigger package coming in 2022.  Advantage 2022. 

2. Macro fundmentals marginally better than now, more global growth in 2018 due to faster growing China.  Inflation and commodity prices were lower.  Advantage 2018.

3. Valuations were much cheaper in 2018.  Lot more froth in 2022, retail and institutional investors much more heavily invested in equities.  Advantage 2018.  

4. Bond yields at 2.50% 10 year and rising.  10 year yields around 1.7% now and rising.  Counterintuitively, unlike what you hear on CNBC and the TINA theory, higher bond yields imply cheaper valued bonds, with more potential upside, and thus providing a better hedge for equities.  Advantage 2018. 

5. Investors much more complacent and much more belief in the Fed put and much more "they will not let it crash" thinking now than back in 2018.  Much higher equity inflows over the past year than in 2018.  Retail investors were much less interested in stocks and less invested than they are now.  Advantage 2018.  

2018 looks more bullish than 2022 on 4 out of the 5 categories.  

2016-2017:  Not too many similarities, 2017 had a Fed that was starting a tightening cycle but SPX was not technically overextended after mediocre years in 2015 and 2016. 

2015:  

1. Fed had finished tapering, but would embark on a mindboggling 12 month pause of doing nothing but jawboning with finally the first rate hike in December 2015.  No fiscal stimulus, it was still the budget conscious years, with the Tea Party having a heavy influence on the Republicans and Obama not very bold with government spending. Advantage 2022.  

2. Macro fundamentals better in 2015, even as China was slowing down, as the organic growth rate (population + productivity growth) was higher in US and Europe, as well as the emerging markets.  Advantage 2015.  

3. Valuations were much cheaper in 2015.  No contest.  Advantage 2015.

4. Bond yields at 2.17% 10 year and falling.  Higher yields than now and curve was steeper thus more upside for the long bond than now.  Advantage 2015.  

5. Scars from 2008 still there, retail investors didn't have much interest in equities, most of the interest was institutional.  Most fund flows went to bonds and relatively small equity inflows.  Advantage 2015.  

2015 looks more bullish than 2022 on 4 out of the 5 categories.  

2008-2014:  Fed was stuck on zero rates with no signals for rate hikes.  Valuations much lower, and SPX was not overextended.  No similarities to now.  

2007:  

1. Fed was done with the rate hiking cycle, but was not ready to start a rate cutting cycle yet.  Fiscal policy was limited and passive.  Advantage 2022.  

2. Macro fundamentals arguably worse in 2007 considering it was the pre QE era and before the start of financial repression.  Economy was more susceptible to a recession due to the housing bubble and higher household debt as percentage of GDP in both US and Europe.  Commodity prices were much higher (inflation adjusted). Advantage 2022.

3. Valuations were much cheaper in 2007.  Advantage 2007.  

4. Bond yields at 4.70% 10 year.  Much better hedge for equities than now.  No contest.  Advantage 2007.

5. Scars from 2000-2002 dotcom bust still there, public was much more interested in real estate than equities.  Much lower household allocation towards equities than now.  Advantage 2007.  

2007 looks more bullish than 2022 on 3 out of 5 categories.  

2004-2006:  Stock market was still well off of all time highs set in 2000, not much investor enthusiasm, SPX was not overextended.  

2001-2003:  SPX was in a bear market, totally different environment. 

2000:  

1.  Fed had just started a rate hiking cycle, but most only expected 2-3 more hikes.  More hikes expected now.  US was running a budget surplus!  No contest.  Advantage 2022.  

2.  More organic growth (younger population, higher population growth rate, higher productivity growth) in all the developed markets and in China.  No contest.  Advantage 2000. 

3.  Valuations were extremely high in 2000.  But from a potential earnings growth perspective, cheaper than in 2022.  Advantage 2000.

4.  Bond yields at 6.50% 10 year.  A totally different world in fixed income where yields were much higher than inflation.  Extremely good positive real yield hedge for equities.  No contest.  Advantage 2000.

5.  After the great bull market from 1982 to 1999, equities were the most popular they've ever been in US stock market history.  Rampant speculation in internet stocks.   Early 2021 comes close, but can't match that speculative fervor.  Household allocations to equities are similar to now.  Overall investment sentiment was more bullish in 2000.  Advantage 2022.   

2000 looks more bullish than 2022 on 3 out 5 categories. 

Since 2000, there are 4 years that somewhat resemble the investing environment in 2022 (2000, 2007, 2015, 2018).   They are all less bearish than 2022.  All 4 of those years had a greater than 12.5% down move in SPX.  2 of the 4 lead to bear markets.  

Objectively looking at those 4 years, 2000 and 2018 seem to be the most similar to the current market.  2000 from an investor sentiment/equity allocation/valuations perspective, 2018 from a Fed/fiscal policy/macro environment perspective.  Get ready for a waterfall decline in 2022 of at least 600 SPX points, and a good chance at a start of a new bear market.  

On the current market, covered the remaining index short and neutral on the market.  Would not surprise me if it either went to 4800 or 4600 from here within the next 2 weeks.  Now I am a buyer of dips down towards 4600.  Not interested in shorting until we make 1. new all time highs and 2. It is February or March.  Done with shorting for January.