Why investors might feel like it’s the ‘90s again
Author: Kevin McCreadie
June 13, 2019
A recent headline in the Irish Examiner online reads, Back to the Future: Why the 90s is seeing such a revival. It’s the latest article in a growing line documenting our growing obsession with the final decade of the twentieth century. In it, references are made to Captain Marvel, the recent superhero blockbuster set in 1995, Kurt Cobain and also Friends, which 25 years after its debut, remains, thanks to Netflix, one of the world’s most watched television sitcoms.
There are also nods to the Sony Discman, Adidas Gazelle runners and tiny backpacks, but what it doesn’t mention – aside from a cursory line about the dot-com bubble – is how some aspects of the current market environment also harken back to the 1990s.
Some aspects of the current market environment harken back to the 1990s.
Take, for example, the current herd of tech “unicorns” highlighting the market for initial public offerings (IPOs) so far this year. While it’s true that many of these companies are far more established than when their dot-com predecessors went public, it’s hard not to notice just how many remain profitless despite having US$1-billion valuations or more.
An even better parallel to the ’90s, however, might be the U.S. Federal Reserve’s stance on interest rates as it continues to play out over the next few months. After a series of rate hikes over the past couple of years, the U.S. central bank is now on pause as it contemplates weakening economic data and weighs the potential impact on future growth of escalating trade tensions between the U.S. and China.
While there’s still a chance the Fed’s next move is higher, Chairman Jerome Powell recently signalled an openness to reducing rates if the economic outlook deteriorates and markets are now predicting two cuts before the end of the year.
The Federal Reserve found itself in a similar position in the mid to late 1990s despite facing much different issues, notably the collapse of hedge fund Long Term Capital Management and the Asian financial crisis.
Starting in February of 1994, then-Chairman Alan Greenspan announced six rate hikes in succession before cutting rates three times in the second half of 1995 and early 1996 and then raising once again in 1997. From there, the Fed changed course again, cutting rates three more times in 1998, which ultimately helped fuel the dot-com frenzy and led to the market collapse in 2000.
While investors today aren’t gripped by the same “irrational exuberance” that was so evident two decades ago, there’s every chance that equity markets could rally higher if Mr. Powell does as is widely expected and cuts rates starting in September.
So, while it may not exactly smell like teen spirit all over again, it’s starting to look like some animal spirits are headed our way.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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