The first decade of the new millennium will go down in history as a decade plagued with a series of booms and busts. Over the past 10 years, there were five major bubbles that captured the world’s attention: Tech/Dot-com (98-00), Housing/Credit (00-07), Emerging markets 00-07, Energy (crude oil) (02-08), and Gold (00-09). After all was said and done, US stocks actually lost ground and the major indices ended lower over the past 10 years for the first time since the 1930’s.
Bubble 1: Dot-com
The 1990’s went down in history as one of the best decades for US equities; thanks, in part, to the massive dot-com bubble experienced in the latter half of the decade. Everyone, everywhere, became a stock market whiz as nearly any stock with a dot-com in its name soared overnight. Many accounts in our office swelled many-fold during that historic period. One account actually grew from $130,000 to over $9,000,000 in the span of about 18months! Thankfully, we quickly moved to the sidelines and preserved a substantial bulk of the gains before the inevitable bubble burst. Unfortunately, most investors failed to do that, if they were fortunate enough to have capitalized at all on the run up. The Dot com bubble sent the tech-heavy Nasdaq Composite Index soaring to a record high of 5,132.50 in March 2000. Then, as is the case whenever the music stops, the bubble burst and the Nasdaq plunged a whopping -78.4% until its bear market low of 1,108 in October 2002. During that horrific bear market, a new bubble was born: The housing/credit bubble.
Bubble 2: Housing/Credit
The horrific bear market had sent the US economy into a recession which caused Alan Greenspan, former head of the Federal Reserve, to begin aggressively cutting rates to help stimulate the economy. A side effect of lowering rates is that money (i.e. credit) became very “easy.” This important fact coupled with the perceived “safety” in owning real-estate (a tangible asset unlike stocks) led millions of people across the globe to begin buying houses. As a result, housing prices soared over the first half of the decade and a new bubble was capturing the world’s attention. However, housing stocks, the first sign the end was near, topped out in August 2005 and proceeded to fall over -75% over the next few years! By the middle of 2007, the entire housing market had entered a private bear market and would pave the way for the 2007-2009 financial crisis.
Bubble 3: Emerging Markets
While the US economy suffered two horrific bear markets and two brutal recessions over the past 10 years, emerging markets flourished. Perhaps, the primary beneficiary has been Asia. Most Asian economies have enjoyed tremendous economic growth over the past 10 years thanks to a global shift in manufacturing, surging energy prices, and an artificially weak peg against the US dollar. The four best known emerging markets are Brazil, Russia, India and China- otherwise known as BRIC. China has pegged its currency against the US dollar which has given Chinese companies an artificial advantage as China fully embraces capitalism. Russia has enjoyed tremendous wealth over the last decade largely due to soaring energy prices. With over a billion people, India has benefited from the outsourcing craze of the past decade and has emerged as an formidable IT hub for that region. Meanwhile, Brazil continues to enjoy robust economic growth and has emerged as the strongest and most stable economy in South America. In 2008, after the financial crisis struck the globe (thanks in part to several other bubbles bursting at the same time), emerging markets plunged precipitously before bottoming in the first quarter of 2009. They have also played a pivotal role leading the global economy out of the worst global recession/bear market in nearly a century.
Bubble 4: Energy
Crude oil spent the first few years of the last decade trading near its historic high of $40 a barrel before trading above it and never looking back. Then due to tight supply and robust demand, largely caused by the credit bubble, crude oil more than tripled before soaring to a record high just over $147 in the summer of 2008! Higher energy prices served as an indirect tax on American consumers and businesses. Nearly, everyone raised their prices to help compensate for surging energy prices. The entire US airline industry changed its pricing structure in order for them to stay alive during this very difficult period. Finally, the oil bubble burst in the summer of 2008 and oil prices spent the next several months plunging-77.5% before bottoming in the first quarter of 2009 near $33 a barrel. At this point, the housing/credit bubble had just burst which proved too much for the global economy and for the first time since World War II, the entire global economy slid into a recession.
Bubble 5: Gold
During this decade mired by a slew of booms and busts, gold has emerged as one of the strongest assets classes. During the brutal worldwide bear market of 2007-2009 gold was one of the only asset classes which did not implode. Crude oil tanked -77.5% from $147 to $33 a barrel. The Dow plunged -54.43% from its Oct 2007 high to its March 2009 low. Meanwhile, gold “only” fell -34% from its March 17, 2008 high of $1,032 to its bear market low of $682 in Oct 2008. Since then, gold is the only asset class that has recovered its entire decline and has surged to new all time highs! This healthy action (outperforming on the way down and up) illustrates how strong gold actually is. In addition, gold has rallied over the past nine consecutive years and jumped +24% in 2009 alone! Will this bubble end? Of course, but until it does, the bulls definitely deserve the benefit of the doubt.
2009, 2010 and Beyond For The Stock Market:
The 2000’s will go down in history as a blasé decade for the stock market. Over the past 10 years the major averages are actually down ,which is a historical anomaly. During that period, the tech-heavy Nasdaq Composite Index is the standout loser- shedding a whopping -44% while the benchmark S&P 500 lost -24% and the Dow Industrials gave up -9%. Over the past 100 years, there have been multiple times when the stock market spent nearly two decades moving sideways before a new massive multi-decade bull market was born. The first 10 year consolidation occurred between 1906-1916 and was followed by the roaring 20’s and then the Great Depression. The next notable consolidation occurred between 1966-1982 (16 years) before the massive bull market of the 1980s and 1990s was born. Are we in the middle of one of those protracted consolidations? Yes, evidenced by the fact that the major averages have been trading in one massive base over the past 10 years.
In 2009, tech-heavy Nasdaq Composite led its peers, surging a whopping +45%. The small cap Russell 2000 index jumped +25%, while the benchmark S&P 500 and Dow Jones Industrial Average rose +24% and +19% respectively this year. Since the March lows, the Russell 2000 vaulted +85% while the Nasdaq composite surged a whopping +81%. The S&P 500 and Dow Industrials rose +70% and +64%, respectively. On a percentage basis, the past nine months have been one of the strongest in history which bodes well for the bulls.
Looking at the market, the action remains constructive. The Dow Jones Industrial Average, small cap Russell 2000 Index, S&P 500 Index and Nasdaq Composite and NYSE Composite indices are all trading just below their respective 2009 highs which bodes well for this rally. The inverse relationship with the US dollar has eased in recent weeks as both stocks and the greenback have rallied in tandem. Ideally, one would like to see leadership and volume expand over the next few weeks as the major averages continue advancing. As always, we will continue to objectively analyze price and volume to better understand the market’s underlying health and remain fluid with our approach. Never argue with the tape, and always keep your losses small.
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