Stock market history offers a clue to potential upside, albeit with plenty of risk
Sometimes I get mistaken for being a bearish investor. That’s probably because I am the guy in the room who is always speaking about risk-management. I think that makes me a hedged investor!
As it turns out, I am not a bear, or a bull. I am a realist. And I have enjoyed the massive stock market rebound the past 5 months as much as the next person.
However, I also know this: every investment has the potential for future price appreciation. Every darn one. The key difference is how much risk you take to get that potential appreciation.
These days, the side-car to that discussion of reward and risk plays out in the land of fundamental investing. That is, how much are you paying for those corporate earnings. Since I am more of a market technician and quant than a “fundamentalist,” I will leave that for others.
That’s probably a good thing right about now. You see, from a historical standpoint, the stock market has lost its mind. We are in such unprecedented territory, it makes sense to stop and get some perspective.
Perspective on the current stock market climate
That perspective comes less from asking your buddy, or your wealth advisor, and more from a relatively unbiased view. That view is made possible by reviewing some stock market history.
The closest thing I can find to the recent 5-month mega-move in the U.S. stock market is that which occurred back in 1999 and 2000. There’s a lot of chatter out there right now comparing today’s market to that Dot-Com Bubble period. While I think it’s justified, I do think that every market deserves a fair look. After all, history does not repeat itself exactly.
What does the future hold?
The graph above shows the Nasdaq 100 Index ETF’s giant move up from the March 23, 2020 low point. The Nasdaq 100 is up more than 70% in just over 5 months. Nice. Now what?
For a clue, we look back at the time that same index nearly doubled. That was in late 1999 through March of 2000, at which point the U.S. stock market went into a 3-year tailspin. Here is the Nasdaq 100 flying over 70% higher, but in only 4 months.
So, as 70% up moves go, the Nasdaq is currently about where the 1999-2000 move went through early February (2/8/2000 to be exact). What happened from there? Well, I already told you that the market fell for 3 years. But not immediately.
The Nasdaq move, which powered the S&P 500 higher to its ultimate top, accelerated one more time in February and through most of March, finally peaking on March 24, 2000. Those last 6 weeks looked like this:
How much fuel have we got left?
So, even AFTER the Nasdaq had climbed by over 70% in a very time frame, it had ANOTHER 15% gain left in the tank. Now, consider the current investment environment. Valuation doesn’t seem to matter. Earnings are opaque. Mortal industries (i.e. those that are not technology, telecom or electric vehicle businesses) are doing most of the lifting. And, the Nasdaq chart is in, well, uncharted territory.
That’s a recipe for either big losses or big gains in the near future. Again, there is return potential in everything. The question is, how much risk are you willing to take to go for it?