Did Anyone Make Dow 30,000 Hats?

History Repeats but It Often Rhymes

Yesterday, when the Dow Jones Industrial Average (INDU) crossed the 30,000 level, my wife reminded me of the frenzy when the Dow neared the 10,000 level. Hats were printed in anticipation of that milestone, and the financial media was poised on the bustling floor of the NYSE to report on the event. A celebratory mood was in the air.

That was the scene in March 1999. Investor enthusiasm was soaring. Tech stocks were all the rage, with the public fixated on the newly adopted world-wide-web. They anticipated that the internet would change the economy in profound ways and were more than willing to invest in its prospects. And it was never easier for individual investors to do just that. Web-based brokers joined the scene, allowing ordinary people to trade stocks without calling a stockbroker. Disintermediation led to great access to markets and lower transaction fees. Although Federal Reserve Chairman Alan Greenspan had warned about irrational exuberance, the Fed had an accommodative stance. There were serious concerns about “Y2K” – how the changing of the millennium could affect legacy computer code – and the Fed was committed to doing their part to facilitate liquidity throughout the economy.

(The reason for my wife’s recollection about Dow 10k was similar. She was responsible for brokerage systems at Prudential Securities, and like many computer professionals, her team was petrified about whether their systems were robust enough to handle the extra digit in the most widely followed market indicator. They were)

Of course, we now look back on that period as the internet bubble. While investors were correct in their assessment that the internet would have profound benefits to the economy, in hindsight they grossly overpaid for that assessment. Many of the high-flying market leaders of that era proved to be ephemeral (Pets.com, The Globe.com, AOL are just a sampling).Y2K turned out to be a false alarm. The concerns were justifiable, but most systems were properly debugged or reprogrammed in advance of the new year. The Fed began to drain some of their prophylactic liquidity, which led to the ultimate demise of the internet bubble a few months into 2000. 

This time it’s different, right? Is it though? In the sense that we have just navigated the markets (if not the economy as a whole) through an unprecedented global pandemic, of course, it’s different. Yet there are many similarities, some troubling. Until the past month or so, markets were led by the staggering performance of tech stocks. Some of those stocks are the most successful survivors of that era – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL) come to mind. Their recent success has been so overwhelming that those stocks alone account for nearly one-fifth of the S&P 500 Index’s (SPX) market capitalization. As in that era, there are other startling success stories of a more recent vintage, such as Facebook (FB), Tesla (TSLA), and a multitude of other technology highfliers like Zoom (ZM), Peleton (PTON), and many others.  As in 1999 some of them sport stratospheric valuations, leaving them highly susceptible to a change in market sentiment. Sentiment was exuberant in 1999, and it is certainly high in 2020.

As in 1999, it has also never been easier for individual investors to participate (or speculate) in stock markets. Phone-based trading has largely superseded computer-based trading for many, and even those who use computers are largely untethered from their desks. Commissions have plunged to zero, and the advent of fractional shares have made it possible for even the smallest of investors to participate in the highest-priced shares. The options and ETF marketplaces have been similarly democratized, making it ever easier for investors to employ leverage, make sectoral investments, or both. 

On the monetary front, the Federal Reserve expanded its balance sheet in a heretofore unimaginable manner. That proved to be a desirable and highly necessary accommodation in response the chaos brought by the Covid pandemic. Like Y2K, however, this too shall pass. Stock investors are already looking through the current crisis to a post-vaccine return to normalcy. It seems reasonable to expect that the Fed would be required to remove some of their accommodation when that occurs, though they have expressed that they will wait for inflationary pressures to become apparent before they do that. A more restrictive Fed was not on the horizon in the heady days of March 1999, and markets are similarly unconcerned about that prospect now. 

The Dow crossed another 5-digit milestone yesterday, just as it did yesterday. It is said that history doesn’t repeat itself, but it often rhymes. The current milestone wasn’t greeted with the same sort of enthusiasm as it was when it first crossed the 5-digit threshold (among other reasons, there are few left to celebrate on the NYSE floor), but many of the surrounding circumstances have a very familiar ring to them. Will the eventual outcome be similar or different? Time alone will tell.

Happy Thanksgiving!