March 11th, 2015
by Rob Isbitts, Sungarden Investment Research
As the Nasdaq approaches 5000 again, what has really changed?
This picture is the story of many investors' lives, providing they were investing 20-25 years ago. While younger investors may not be able to "feel" the similarities between today's investor environment and that of the late 1990s buildup to the Nasdaq Composite hitting the 5000 level, those of us who remember it probably remember the feeling. The air was sweeter, the money greener, and a sense of serenity existed which was akin to getting a 2-hour massage...that lasted for years.
Source: Ycharts.com 2015
Nasdaq 5000 first occurred in March of the year 2000. It is knocking on the door again. At Sungarden, we are not in the prediction business but we ARE in the business of evaluating reward vs. risk tradeoffs. And they are tilting ever so gradually toward higher risk and lower reward for traditional investment approaches. And like what followed Nasdaq 5000 the last time, we would not expect a bell to sound signaling an end to the stock bull market we have had since around this time in 2009. And in our own portfolios, we are still enjoying the ride higher, in our own "hedged investing" way. But caution flags abound. Here is what we see, in reference and deference to that old, great bubble of a market that that ended in early 2000 and, for the Nasdaq Composite Index, marked the start of a 16-year period in which your return was about zilch.
- Technology stocks were at the top of minds, media and portfolio weightings. Today they are not called "internet" stocks as they were back then. But ask a novice investor about their portfolio, and the same emerging tech names tend to blurt out.
- Private companies are being valued at levels that seem foolhardy to value-oriented investors like us...but we are probably in the minority, and too old and dumb to really understand this new era all of the millennial investors have figured out how to conquer. Hey, where is Stuart, that red-hed kid from the E-Trade commercial from the late 1990s, when you need him (if you get the reference, you definitely remember the dot-com bubble!).
- Investing in the stock market still works like it used to on the surface...but the players and forms in which it comes in have changed. ETFs, High-Frequency Traders, Hedge Funds, etc. are all a bigger force than at the time of the first Nasdaq 5000. But investor hubris? That's still there. The biggest difference is that today, someone's opinion can be known by millions in a second. Back then, you might find out faster than a newspaper, but only if you had one of those newfangled AOL accounts. Geez, I sound like that guy at Disney's "Carousel of Progress" ride, don't I?
- One thing that was not the same back then: high-quality bond rates. Back then, 10-year U.S. Treasury Bond yields started with a 6. Today they start with a 2. All that means is that if Nasdaq 5000 turns out to be another last gasp in an over-levered economy, and not the launching pad for a new era of wealth creation, a major cushion for equity investors is gone. That will require a different escape plan for investors. That's what we are focused on managing here.