Despite massive deficit spending, the performance of the stock market in the last 15 years has not even come close to what was realized in the 1990s. What does this ultimately mean? Here is an attempt to provide clues.
Massive quantitative easing and deficit spending have resulted in skyrocketing public debt.
In the late 1990s, speculative investments in technology drove the stock market, while budget balancing was an undesirable policy. After the dot-com crash and an attempt to recapture the 2000 highs, the stock market plunged again due to the financial crisis.
Let us look at the rolling 10-year performance of three key metrics for the S&P 500 index total return: the Sharpe ratio, the annualized return, and the total return.
During the 1990s bull market, the 10-year Sharpe ratio reached as high as 1.5, the 10-year annualized return grew to about 20%, and the 10-year total return climbed to more than 510%. Due to the dot-com crash and the financial crisis, these metrics plunged to -0.2, -4.2%, and -34.5%, respectively.
Quantitative easing and massive deficit spending, coupled with low rates, created fertile ground for speculative investments and technological growth. After the correction of 2018, the 10-year rolling Sharpe ratio, annualized return, and total return reached 1.1, 17.7%, and 382%, respectively. Since then, the market has not recaptured those levels for these key metrics. The above charts show that all three metrics have moved sideways since 2018.
In our opinion, useful tech innovations drove the 1990s rally. Although there were exuberances, the technologies developed in the 1990s were crucial to maintaining the dominance of the US economy and its hegemony. However, despite the current attempt at a 1990s replay based on digital asset and artificial intelligence developments, it appears unlikely the market will repeat the performance of the 1990s.
Is it too early to conclude this?
We think that whereas the 1990s technological breakthroughs led to the dominance of US corporations and, through that, US politics and ideology, the current narratives lag in both significance and strength. In other words, it is possible that massive additional spending in artificial intelligence and digital assets could amount to a misallocation of resources and will hurt the traditional economy that generates tangible value. AI may increase productivity but at the cost of significant second-order effects. Simultaneously, the expenditures enhance the wealth of a select group of entrepreneurs who make promises of an unattainable reality.
All of this appears to be a significant risk with uncertain outcomes and potential repercussions, encompassing both domestic and geopolitical aspects. We may be wrong, but we still think that making the stock market great again, as in the 1990s, will require a new, more powerful, and value-related narrative that does not alienate the labor force and does not instill fear of job loss. There is a risk of massive consolidation in small businesses and more centralization, increasing inequality, the rise of extremism, and market volatility. A stock market of 7 or 20 ultra-cap stocks is not what we should be aiming for.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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