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September 5, 2007 (9:15 AM)
Ominous Shades of 2000
With everyone focused on whether or not today will be a repeat of 1929, 1987, or 1998, what people forget to ask is whether or not the coming bear market will resemble 2000.
To begin with, although in 2000 tech/internet stock were crashing (much like say homebuilders in 2007), the main U.S. index, the S&P 5000, was up by almost the same amount back then as it is today.
For those of you with a good memory, September 2000 marked the beginning of the bear; with the S&P 500 starting to slide on the second session of the month (or today by comparison), and closing down 13.1% from its Sept 1, 2000 peak by years-end. In other words, the S&P 500 is at nearly the exact same % gain right now as in 2000 and the index is less than 40-points from where it traded at 7-years ago.
Not being overly superstitious, I will refrain from exploring the above charts further, instead highlighting some other comparisons:
In 2000: After a prolonged period of wealth creation a crash in technology/internet stocks presaged a dramatic slow down in capital spending. There was the widespread belief for most of the year that the tech crash could be contained and that ‘old economy’ stocks would remain in favor, but by late 2000 the extent of the damage was starting to show and the majority of stocks began to slide.
In 2007: After a prolonged period of wealth creation a real estate slump could be foreshadowing a sharp slow down in consumer spending. Economists and analysts still widely believe that the ‘subprime’ fallout will be contained and that equities will remain in a bull market. Does this mean that by late 2007 the extent of the real estate/credit slow down start to show and stocks about to enter serious slide?
The bulls say no, arguing that the Fed can pump things up like it did after the 1987 crash, LTCM in 1998, and in 2003, while the bears are confident that the Fed will fail. To end with one final comparison consider the following:
By the time the Enron debacle arrived in late 2001 the Fed had already cut interest rates seven times (300 bps) and the S&P 500 had already lost 29% of its value since March 2000. Also to note, this decline happened before 9/11 arrived.
In short, if there was a way to quickly blowup subprime paper (and nothing else in the process), and if U.S. housing prices could suddenly stop falling, the ‘contained’ argument would have credibility today. Unfortunately the lesson from the 2000-2002 market meltdown is that once asset price deflation (or simply stagnation in today’s case) begins it is not necessarily immediately cured by monetary inflation. |
