Derailing a bull market requires a catalyst—and they are rarely obvious even to the most sophisticated investors.
Sentiment indicators are near or at euphoric levels, Schwab’s chief investment strategist Liz Ann Sonders said this morning. One thing she has learned in decades of investment strategy is that sentiment indicators provide a “big tell,” maybe a bigger tell than all the numerous fundamental data points experts like to zero in on.
Speaking at John Mauldin’s Strategic Investment Conference, Sonders was asked to compare the current bull market to the tech bubble of the late 1990s. She managed to detail the differences—and similarities—with ease.
In her view, there are some obvious similarities between the widespread euphoria two decades ago and today’s mood. One big factor that was absent in the late 1990s was the presence of Wall Street Bets on Reddit.
She acknowledged there were online chat rooms and message boards back then. They just weren’t as organized. The advent of the Internet was "a force for massive change in society," she said. "It doesn't mean there wasn't a lot of silliness associated with it."
Sky-high price-to-earnings multiples usually are the defining characteristic of a bubble. Sonders, in an interview with Mauldin Economics’ Grant Williams, noted that multiples spiked much more quickly in the late 1990s than they did in the last decade, when the increase was more gradual.
There was another big difference between today and the 1990s. In the 2020 pandemic, multiples soared partially because earnings, or “the numerator,” collapsed as a result of the lockdown. Then, at the same time, the Big Five tech stocks soared as they reaped the whirlwind of the government-mandated shutdown, she noted.
Now multiples are returning to earth and earnings in the rest of the economy are recovering. Back in the 1990s, stocks went straight to the moon—but only a handful of companies like Microsoft and Cisco posted record profits.
Another point of differentiation this time is that equity leadership has managed to rotate among a smorgasbord of “micro-bubbles,” she said. In the summer of 2020, it appeared likely we might see a replay of 1999, as Facebook, Amazon, Alphabet, Apple and Microsoft suddenly represtented more than 25% of the Standard & Poor's 500 total market capitalization. Yet today the market managed to correct some of its "excesses" and leadership rotated into some more value-oriented, reopening sectors.
Right now there is no obvious catalyst to burst the bubble. Williams noted that there were two trigger events that happened in early 2020. Cisco Systems missed its expected earnings number by a penny a share and the Federal Reserve started to raise interest rates.
"This time we don't see monetary tightening soon," Sonders said. She added that some so-called fundamental yardsticks, including Warren Buffett's favorite Tobin Q ratio (the market value of all equities divided GDP), are as much behavioral as they are fundamental.
One major risk she thinks might be lurking is that the V-shaped recovery we are witnessing turns out to be much shorter-lived than investors expect. If "we don't see a [big] drop in savings rates," the economy could return to very slow growth, she said.
As fiscal stimulus fades into the rearview mirror, the slow pre-pandemic pace of expansion is a real possibility. Sonders declined to read too much into the dramatic disappointment of the April jobs report. Like others, she said the report included some strange seasonal adjustments.
However, she did say she wasn't sure that we "are in a bad data is a good framework for the markets." Stock prices have responded well to good data over the last year.
Nonetheless, Sonders said next month's job report will "be critical" in determining whether the April report "was a blip" or whether job growth may already be peaking.