This Market Rally Is Unlike the Market Tops of 2000 and 2007
- Erik James Roberts, Founder & Chief Investment Officer | Infinitus Wealth Management
- Jul 10, 2023
- 4 min read
The current state of the stock market shows few warning signs that were present during the market peaks of 2000 and 2007. While many draw comparisons between today's equity market and the bursting of the tech bubble and the financial crisis, the differences rather than the similarities stand out.
If the market were to decline and reach new lows, it would likely be due to different reasons than those experienced in the past. Therefore, cautious optimism is recommended.
Identifying a market top is useful; although each top is unique, they often share certain characteristics. These include signs of excessive corporate enthusiasm, extremely high valuations, weakening leading economic indicators, and stretched sentiment and positioning. However, there are significant differences in today's market compared to the previous market peaks:
Reduced corporate excess due to the effects of rate hikes dampening activity.
Improved liquidity and financial conditions instead of deterioration.
More supportive technical indicators.
Less extreme sentiment and positioning.
Less pronounced extremes in corporate behavior, such as M&A, IPOs, leveraged buyouts, share buybacks, and fundraising for venture capital and private equity. The extremes mainly occurred in 2021 and 2022 and have subsided since then.
Lower growth in corporate credit (bank loans and corporate bonds) compared to 2000 and 2007, with 2020 being an anomaly due to pandemic-related loan assistance. M&A activity peaked in 2000, 2007, and early 2022 but is currently lower.
The Federal Reserve's 500 basis points of rate hikes since last year have mitigated excessive leverage and corporate activity.
Moreover, the household sector is in a more stable position than in 2000 or 2007, especially after the global financial crisis triggered a deleveraging process that continues to this day. Despite the rapid rise in interest rates, consumers' debt-service ratios are lower now than in 2000 and 2007 for both loans and mortgages.
Another significant difference is the more supportive liquidity conditions for stocks today. Excess liquidity, which measures the difference between money growth and real economic growth, has been rising this year, providing support for the impressive stock market recovery. In contrast, excess liquidity was not as supportive during the market peaks of 2000 and 2007.
A notable distinction between today's and previous market tops is the technical indicators signaling the beginning of a new trend rather than the end of an old one. The absence of Hindenburg Omens, a technical indicator associated with crashes, and the activation of the Coppock indicator, which has historically indicated good buying opportunities, further differentiate the current market from 2000 and 2007.
Furthermore, various breadth, positioning, and sentiment indicators suggest that today's market is less vulnerable than during the previous market peaks of 2000 and 2007. Despite the initial rally in 2023 being driven by a limited number of stocks, it has broadened and appears more resilient. When considering breadth, sentiment, and positioning scores, today's market is overall less excessively bullish and less invested than it was prior to previous market tops.
However, one area where today's market does resemble 2000 and 2007 is in measures of long-term valuation. Cyclically-adjusted P/E, price-to-sales, price-to-book, total market cap-to-GDP, and Tobin's Q ratios are either similar to or slightly higher than the levels observed during the previous market peaks.
Nevertheless, as recent years have shown, the market can remain overvalued for an extended period. Therefore, a tempered bullish approach is advisable in this market environment.
At Infinitus Wealth Management, we offer a complimentary, no-obligation portfolio review for investors who want an independent fiduciary second opinion on how their capital is actually being managed.This is a conversation, not a sales process. If your portfolio is already well constructed, we will say so directly. If we identify avoidable costs, unnecessary concentration, tax inefficiencies, or portfolio structure that may be working against you, we will show you specifically where those issues exist. From there, you decide what to do with the information.
Important Disclosures
Infinitus Wealth Management is a registered investment advisory firm. This article is provided for educational and informational purposes only and does not constitute investment, tax, legal, or accounting advice. It is not an offer or solicitation to buy or sell any security or to enter into any advisory relationship. Any references to specific strategies, withdrawal rates, tax provisions, or historical figures are general in nature and may not be appropriate for any individual investor.
Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Tax laws are complex, change frequently, and have unique application to individual circumstances; please consult a qualified tax professional regarding your specific situation. Social Security rules, Medicare rules, and retirement account regulations are subject to legislative and regulatory change.
The information in this article was believed to be accurate at the time of writing but is not guaranteed. Readers should consult with their own qualified advisors before making any financial decisions specific to their situation.
