Party Like It's 1999

“Remember the whole panic surrounding Y2K, that embarrassing time in our history when people all over the planet were afraid that planes would be falling out of the sky, bank accounts would revert back to $0, and we'd all devolve back into our primitive, agrarian societies simply because some computers couldn't tell the difference between 2000 and 1900? . . . But for any of you who weren't waiting around for the world to end on December 31, 1999 or [were] dancing along to Prince while wearing a party hat, you may have watched the DJIA, S&P 500, and NASDAQ Composite Index all do something notable [i.e., hit all-time highs].” (From Andrew Adams, Raymond James Technical Analyst.)

Now, sixteen years later, while we can no longer party with Prince, these same market tops have converged again.

On Thursday, August 11, U.S. stocks, to quote the Wall Street Journal, “Notched a record trifecta,” where all three U.S. indices reached new records on the same day. This is the recipe of which exhilaration is often made. For investors who follow the headlines but do not have underlying investment context, these simultaneous market tops may signal, “that things are finally strong.” Often in this circumstance, an increase in market buying follows.

Yet, what is the underlying context driving these market tops? Where are we in the investment cycle? By our pencil, U.S. stocks were already somewhat overvalued (when we compare stock prices to earnings) prior to last Thursday. Thursday’s market milestone could stretch values even higher, but with likely volatility along the way, especially given the pending presidential election and world conditions. However, unlike 1999 when it sometimes felt like the tech stock party would never end, we must remember that overvalued markets do eventually drop into the next bear market before reorganizing into the next upswing.

That said, we don’t think the next bear market is immediate – the party may be “on” for some time. Not surprisingly, you’ll see us encouraging the same discipline we’ve espoused for years, in fact, since our firm was founded eighteen years ago:

  • Choose a risk/reward strategy that supports your long term goals and monitor it carefully.

  • Diversify and incorporate current global trends.

  • “Juice” your potential returns by taking some profits in high times (sell high) and buying some bargains in down times (buy low). We call this being a “contrarian Investor.”

  • “Hang in there” by abiding by your above risk/reward strategy through thick and thin. This is how we deal with what we cannot predict.

Also, for those who are so inclined (currently about one-third of our clientele), you might incorporate Socially Responsible Investing (SRI). This area has certainly matured since 1999.

In the iconic words of Prince, “Dearly beloved, we are gathered here today to get through this thing called life.” Investments – and financial strategies – are just tools that give you the freedom to live life the way you wish. Whether in periods of investment growth or volatility, our mission here at Laurel Wealth Planning is to help you use your many financial opportunities wisely to have the life that you prefer.

As always, please let us know your comments and questions.