This Market Rally Is Unlike the Market Tops of 2000 and 2007

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:

1. Reduced corporate excess due to the effects of rate hikes dampening activity.

2. Improved liquidity and financial conditions instead of deterioration.

3. More supportive technical indicators.

4. Less extreme sentiment and positioning.

5. 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.

6. 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.

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​This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

The views expressed are the views of Infinitus Wealth Management, LLC. These views are subject to change at any time and may not represent the views of all portfolio management teams, Wealth Advisors, or other Investment Professionals. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Infinitus Wealth Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Investment Advice will be given to individual clients based on risk tolerance, time horizon, investment objectives, and other considerations.

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