February 15, 2021 BARRON’S 7
UP & DOWN WALL STREET
Interest rates and P/E multiples are lower than
they were 22 years ago, but the federal budget is
in much worse shape,and a pandemic is raging.
Today’s Stock Mania
Differs From 1999’s.
That May Not Matter.
reflecting the ideas and beliefs of the
times,” he writes in his blog. And that
there is no price too high to pay for
those concepts, in this case disruptive
technologies, most notablyTesla
(TSLA), ARKK’s largest holding.
To date, the doubters have been
left behind, just as they were in 1999.
In fact, the Nasdaq Composite went
from 4000 in June 1999 to a peak of
5000 in March 2000. A month later,
however, it plunged by over one-
third, and it wouldn’t top its 2000
high until 2014.
The differences between that era
and now also are important, and in-
deed are mostly favorable to the cur-
rent market. Valuations are lower than
the nosebleed ones of two decades ago.
According to Strategas Securities, in
March 2000, the 50 largest stocks
traded at a median price/earnings
multiple of 31 times the next 12
months’ expected earnings. On the
same basis, the 50 largest stocks last
month traded at a 23.6 times multiple.
Current P/Es also line up against
much lower interest rates. Benchmark
Treasury yields are historically low,
although they have moved up from last
year’s pandemic troughs. The 10-year
note ended the week at 1.20%, while
the 30-year bond topped 2%, new
highs for the current move and roughly
double their lows. But yields on riskier
securities have continued to fall; “high
yield” bonds slipped to less than 4%
last week, a record low.
In comparison, Treasury yields
were around 6% in the tech bubble
era, as were short-term interest rates,
compared to just above zero currently.
As a result, the yield curve in 2000
was roughly flat, a sign of tight mone-
tary policy, while the currently steeply
upward-sloping yield curve signals an
accommodative policy.
After adjusting for inflation, real
interest rates now are negative, with
10-year Treasury inflation-protected
securities yielding less than minus 1%.
On the fiscal side, the contrast is
even starker. Fiscal 2000 produced a
record $236 billion federal budget
surplus. Alan Greenspan, the Federal
Reserve chairman at the time, fretted
that there wouldn’t be enough Trea-
sury securities for the central bank to
buy. As the former scribbler in this
space, Alan Abelson, wrote at the
time: He needn’t have worried as the
politicians could be counted on to find
ways to spend that dough.
Now, of course, budget deficits are
routinely in the trillions. The Congres-
sional Budget Office this past week
raised its fiscal 2021 red-ink forecast to
$2.3 trillion, or 10.3% of gross domes-
tic product, to take into account the
fiscal stimulus enacted at the end of
December. But, as John Ryding and
Conrad DeQuadros, economists at
Brean Capital, point out in a client
note, that doesn’t include the $1.9 tril-
lion stimulus package sought by the
Biden administration.
And contrary to Greenspan’s con-
cerns, the Fed has increased its hold-
ings of Treasuries, relative to GDP, in
tandem with the increase in federal
debt as a percentage of GDP. “Though
we believe this is an important factor
holding down bond yields, for those of
us not inclined to believe in free
lunches, the funding of large deficits
with printed money is another source
of inflation and financial stability con-
cerns,” they conclude.
In the meantime, party on.
F
riday marked the beginning
of the Year of the Ox, which
on the Chinese astrological
calendar is supposed to augur
slow and steady progress. So far, how-
ever, the bulls seem to be in charge of
China’s stock market.
That might have been obscured
from the view of U.S.-centric investors
watching the steady ascent of the major
domestic averages, lifted by progress
on vaccinations, anticipation of more
fiscal stimulus, and the Federal Re-
serve’s continued monetary expansion.
Then there’s the spectacle of the social-
media-induced gyrations of the meme
stocks, including cannabis shares,
which went up 50% Wednesday and
gave back their huge gains Thursday.
By Randall W.
Forsyth
New York Stock Exchange traders in 1999: The public’s enthusiasm for stocks is reminiscent of that era.
P
arty like it’s 1999? Not
exactly an original ob-
servation, with record
stock market readings
bringing to mind the
dot-com bubble at the
end of the last century.
But one was reminded of the late,
great Prince after watching the half-
time show of the Super Bowl just past,
which paled in comparison to his bra-
vura 2007 performance at the height
of his purple reign.
Perhaps what’s most like the 1990s
is the public’s enthusiasm for the stock
market, and not just the frenetic trading
of volatile, illiquid meme shares touted
on Reddit, which recalls the internet
message boards of that era. Once more,
mutual fund flows have turned into
gushers. Global equity funds saw a
record inflow of $58 billion in the latest
week, according to Bank of America
Global Research’s parsing of data from
EPFR Global. And in a further echo of
that era, the inflows were led by record
buying of technology funds, totaling
some $5.4 billion.
The biggest winners have been the
exchange-traded funds from ARK
Investment, notably red-hotARK
Innovation(ticker: ARKK), which
has attracted the most assets this year
of any ETF, except theVanguard
S&P 500(VOO), our colleague Evie
Liu reported this past week on Bar-
rons.com.
That reminds Doug Kass of Sea-
breeze Partners of the once-hot funds,
such as the former Janus Twenty. “In
every stock market cycle there is a
dominant investor who captures the
Matt Campbell/AFP/Getty Imagesmarket’s zeitgeist by incorporating and