- Feb. 27, 2023
-- Key Takeaways:
- Markets declined last week as incoming inflation data have prompted a renewed lift in interest rates and adjusted market expectations around further Fed rate hikes this year. Stocks are still holding on to solid gains for 2023, but after a steady rally to start the year, markets have seen a renewed bout of fluctuations in recent weeks.
- Current market conditions have some notable differences with the tech bubble period, and we think the present bear market will be shorter and less severe, which should give investors' confidence to lean into periodic pullbacks and stick with portfolio allocations that are aligned with long-term goals.
Market history doesn't always repeat itself, but it does tend to rhyme. No two periods are ever identical, and the current environment is chock-full of unique elements stemming from post-pandemic conditions, but we do see some similarities to the '00/'01 bear market. Understandably, comparisons to the "tech wreck" period may not immediately inspire enthusiasm. However, there are sufficient resemblances (and differences)
that could be both instructive and favorable for what might lie ahead.Similarities to 2000-2001
1. The Fed had tightened policy.
2. The economy slowed modestly, but consumers were in decent shape.
- The Fed raised rates six times between June 1999 and June 2000, which included a final 0.50% hike, the last single hike of more than 0.25% until 2022. While the inflation rate had more than doubled, Fed policy tightening was aimed at curbing financial-market exuberance and the growing equity bubble. While motivated by different factors, the result has been similar – Fed rate hikes in 2000 and 2022 were a catalyst for a bear market in stocks.
- The yield curve (the 10-year Treasury rate minus the 2-year rate) inverted meaningfully in early 2000, as the Fed pushed short-term rates higher while long-term rates began to moderate under a waning growth outlook. Today, the yield curve is the most inverted it's been since that time, with 2-year yields roughly three-quarters of a percent above the 10-year rate1.
Source: 1. Bloomberg, PE ration based on forward 12-month consensus EPS estimates for the S&P 500.
- The economy was quite strong in 2000, with quarterly GDP growth averaging 3% that year. While an official recession did emerge, it was historically shallow and short, with only the first and third quarters of 2001 registering a contraction in output, and quarterly GDP readings averaging 0.2% for the full year (for comparison, quarterly GDP averaged -2.5% in 2008). The economy has exhibited similar strength recently, with GDP in the final two quarters of 2022 averaging 3%.