Market Watch: Stock Investors in 2020 Should be Careful About Partying Like It's 1999

January 13, 2020

Article by Vitaliy Katsenelson in The Wall Street Journal Market Watch

The U.S. stock market marched higher in 2019 even though U.S. companies as a whole did not become more valuable, just more expensive, as earnings failed to grow from 2018. Earnings are estimated to be up about 5% for 2020 (though these estimates are usually revised down as the year progresses).

If you look at the quality of this non-growth, then the rose-tinted glasses of the average stock market investor quickly prove inadequate. Corporate debt is up 5% in 2019, and a good chunk of the increase went into stock buybacks. As stocks become more expensive, their benefit from earnings per-share growth diminishes.

 The U.S. economy grew about 4% in 2019 — good news, except that the national debt grew about 5.6%, or about $1.3 trillion; our debt-to-GDP currently exceeds 100%; paradoxically, the 10-year Treasury yield has dropped to 1.8% from 2.6%. Maybe not paradoxically: the Federal Reserve went from a faint attempt of quantitative tightening starting in the fourth quarter of 2018, which caused stock market to have a mini-crash a year ago, to quantitative easing in the second half of 2019, which arguably caused the market to go up.

Just pause for a second, remove your gaze from the stock market, and think: Though the service economy (which is two-thirds of GDP) is growing, our manufacturing economy has been in a recession for more than a year. 

What will the Fed do when we actually go into recession?

Party like it’s 1999 — this was the theme of my firm’s annual meeting. This is how the stock market feels to us today. No, there are no dot-coms, though temporarily we had cannabis- and fake-beef bubbles, which got popped. Near-zero interest rates, abundant liquidity, and a perceived absence of risk (and fear) turn money into a crude instrument of bubble creation. This is why the stock market is experiencing a lighter version of the 1999 lunacy.

The more commonsensical and rational you are, the less fun you have been having at this party. But the party will end (it always does), and we are going to be the designated drivers getting our dates safely home. That’s what happened in 2001 and countless other times in history, and it will happen this time, too.

To read this article in Market watch in its entirety, click here.

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