Why the Dow’s top 20 years ago is a warning for stock investors now

Stock investors celebrating the Dow Jones Industrial Average knocking on 29,000’s door should remember what happened exactly 20 years ago.

On Jan. 14, 2000, the Dow DJIA, +0.29%  hit its bull-market high prior to the bursting of the internet bubble. And, yet, you’d have never known it by reading what the newsletter editors then were saying.

In fact, after reading through my newsletter archives from January 2000, I was struck by the similarities between now and then. For example, one newsletter editor in mid-January 2000 said he was encouraged that the Fed was signaling that it wouldn’t be raising rates as aggressively as previously thought. Another said “inflation is dead.” A third celebrated the strength of the economy as evidenced by robust consumer spending in the Christmas season that had just ended.

Sound familiar? To be sure, these similarities don’t mean the U.S. market is at or near a top. But they do illustrate the false comfort we gain when telling ourselves that a bear market can’t happen since the economy is strong, inflation is moribund, and the Fed is accommodative.

As we know, the Dow’s January 2000 top ushered in an extended period of disappointing performance. In late 2011, in fact, the Dow was no higher than where it stood in January 2000. If the future were to repeat this particular segment of market history, the Dow in late 2031 would be no higher than it is today. That sobering thought certainly provides a reality check on any exuberance.

There are three major ways in which it’s important to note the 20th anniversary of the January 2000 market top:

1. Valuations matter

Valuations matter for the market’s long-term prospects. The stock market was undeniably overvalued in January 2000. To show this, I calculated the “z-score” for each of eight

Read More Here...

Bookmark the permalink.

Comments are closed.