Among the tell-tale signs of a market mania is “new era” thinking that allows normally rational people to pay for “growth at any price” as long as it’s in the right sector. That was certainly true of Tech stocks in the late 1990s and the Financials preceding the Global Financial Crisis (GFC) in 2008. In 1999, the Technology sector comprised 29.2% of the S&P’s market cap despite contributing only 12.8% of Index’s earnings.
The spread between earnings contribution and market cap was far more narrow for the Financials in 2007 but concerning when one considers the underlying leverage needed to produce those earnings. The Nifty Fifty was a mania that largely transcended sector boundaries to include both technology issues (Xerox, IBM, Polaroid) and one-decision consumer products stocks (Schlitz, Avon, Revlon). Today, Technology is once again the market’s largest sector. While one could claim that it is becoming somewhat untethered from its earnings moorings, the table below indicates that it is to a far less menacing degree than what investors witnessed in the ‘90s.
It should also be remembered that the end of an equity-based asset bubble is far less economically dangerous than the end of one based on debt. Given the persistence of low interest rates and inflation, we believe the current bull market still has legs. Contrarians should note that, as near as we can tell, CNBC first started to refer to the move off the March 2009 low as a bull market only within the last two weeks. For the past eight-and-a-half years most in the financial media were loath to describe the move as anything but a “rally.”
