Prince’s song 1999 includes these lyrics: “2000 zero zero party over oops out of time, So tonight I’m gonna party like it’s 1999.” When viewing US stocks today, I feel transported back to 1999. With many warning indicators flashing red and investors behaving crazily, I’m concerned about the next stock market crash.
Stock market crash: is this 1999?
I remember the dotcom boom and stock market crash very clearly. It was a time of sudden, steep price spikes in dotcom stocks. It was also a time of stretched valuations, as stock prices soared and the Nasdaq tech index rocketed. And it was a time when retail investors piled into the latest hyped, profitless ‘wonder’ stocks, hoping to make big bucks.
I see the same red flags waving today. Indeed, US volatility — as measured by ‘fear gauge’ the CBOE VIX Index — is much higher today than in 2000. The VIX leapt above 37 earlier this year, almost twice its long-run average. Likewise, US tech valuations look frothy and bubbly. And individual investors, rallied by Reddit thread r/WallStreetBets, push prices of smaller companies around like a turbocharged hedge fund. But when will the next stock market crash arrive? For me, this bull market could run for a while longer.
What worries me today?
Being cursed with a great memory, I often hark back to past stock market crashes. And what I see today makes me agitated. Younger investors urge me to buy grossly inflated stocks in electric-vehicle makers. Twenty+ years ago, newbies were buying shares in Boo.com, Webvan and Pets.com — all of which spectacularly imploded. Today, companies with similar dreams — and histories of large losses — are valued in the tens or even hundreds of billions of dollars. Yikes.
Likewise, the number of initial public offerings (IPOs; company flotations) soared last year, as also happened in the late 1990s. There were 538 in 2020, the highest number since 424 new issues in 2000 and 480 in 1999. What’s more, 2020/21’s huge IPO pops (when share prices soar on the first day) echo the dotcom boom. This rush to float before bubbles burst — notably using special purpose acquisition companies, or SPACs — prominently features in previous stock market crashes. Overvaluation also troubles me. The S&P 500’s Shiller CAPE Ratio (of inflation-adjusted earnings averaged over 10 years) is currently 35, its highest level in over 20 years. That’s far too rich for my blood.
I could be wrong! What will I do?
After 12 years of rising markets, the S&P 500 trades today at almost six times the ‘devilish’ low of 666 seen on 6 March 1999. But with the Federal Reserve promising to keep interest rates low, stocks look a better bet than bonds to me. Also, inflation is subdued and interest rates will remain near zero until inflation starts to take off. Thus, although I feel we are already in fantasy territory today, I don’t see this bubble popping this year. Maybe it will happen in 2022/23, but only if investors come to their senses.
Meanwhile, how do I aim to make money in these hyped-up markets? To counterbalance my portfolio’s heavy exposure to expensive US stocks, I’m planning to buy a big chunk of still-cheap UK shares in quality businesses. Hence, I’m looking to FTSE 100 firms with strong balance sheets, solid revenues and generous cash dividends. By de-risking my portfolio now, I hope to avoid major losses later when the market crashes!
