It’s Not 1999—Yet: Why Smart Investors Are Still In the Game

Stocks are hitting new highs, but stretched valuations, inflation fears, rising tariffs, and Fed drama have some investors flashing back to 1999. In this episode of The Money Runner, David Nelson breaks down why today’s market isn’t the dotcom bubble—yet. From earnings strength to valuation traps, learn why smart investors are staying in the game—and what could change that.

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Stocks at record highs. Inflation fears bubbling up again. And Trump and Powell are still at war and tariffs. Yeah, we have those, too. And the numbers aren't small. Investors are nervous, wondering if we're already on thin ice, replaying the dangerous days leading up to the dotcom crash. Look, I was there. My early days as a portfolio manager at Lehman were about to get a big wake up call. Prince was on the radio singing 2000 zero zero parties over out of time. Tonight, I'm going to party like it's 1999, and maybe you're feeling a little of that déja vu right now. Let's start with that. We know the market climbs of all the world. We often look for data to support the call to get out, pull the ripcord. Valuation might whisper bubble, but history shows that valuation alone is a pretty lousy timing tool. Yes, stocks look pricey compared to other asset classes and even to itself. But remember, they looked even worse in the mid-nineties. But still had a few more years of dancing ahead. So maybe, just maybe, it isn't 1999. Maybe we're partying like it's 1995. It's time to dig deeper. Question the assumptions and more importantly, separate that noise from signal. Are you with me? Welcome to the Money Runner. I'm David Nelson and this is it safe? That's always the question we ask ourselves when we're committing capital to the markets. You look at this chart over the last 100 years, there were plenty of times it wasn't safe. I've lived through a few these the dot com bust 2000 there on the right in the center. A few years after that, the financial crisis and of course COVID in 2020. Who could have done anything about that? Seemed like the end of the world came close to it. The 2022 bear market with rates rising, pretty ugly time to invest. And of course, today, tariffs and the concerns over that. What is it going to mean for the economy? Was it was it what is it going to mean for earnings? And, of course, the geopolitical backdrop for that? Always in on that wall of worry that we live with each and every day. And those are the concerns that that drive investor fear and also for some, some bad decisions. So we need some tools value. Nations don't live in a vacuum. They have to live relative to an alternative asset class. If I'm not going to invest in stocks, where am I going to put the money? So the most obvious place is a risk free treasury and we use the ten year because in many ways it's a proxy used in the economy. It it is the trigger for your mortgage rate. A lot of credit card rates key off where the ten year is. So it's a pretty important metric there. You've got the S&P 500 going back from 1995 to today. On top and below that in green, you have the earnings yield. The earnings yield is just the PE ratio turned upside down where PE is price divided by earnings per share. And and earnings yield is just is just the earnings of the company divided by the market cap, the size of the company. All right. So we get a yield, much like a dividend yield. All right. That purple line is the ten year Treasury yield. Right. And just looking at the chart and looking at the green line and the red line, pretty easy to see that when the green line is above the red line was a pretty good period for stocks. Right. And you can see what I've circled there, those peaks and the green line, that's when the earnings yield was above 6%. All right. Those are pretty attractive times to invest. And you can see it coincides with some pretty big dips in the market. You can see a couple of years after the dot com bust on the left side of the page, that big peak in the middle of this, the financial crisis. However, I will tell you that even with earnings yield at 10%, stocks were pretty scary. Then you were catching a falling knife. All right. Then, of course, got 2012 and then that last one, that's really the dot.com name here. But if you looked at the right side of the page where we are now, almost by definition, you'd have to say our market is pretty expensive relative to history, relative to other asset classes, even relative to itself. Right. Kind of kind of expensive. Yet stocks have pushed even higher. Is that the signal for for for, you know, something ominous, a crash? Well, like I said at the top, valuation is a pretty lousy timing tool on its own. Zoom in. All the way to the left side of that page there. And you're going to see that the nineties, this is the mid-nineties 1995 through to 2000 were much worse. Treasury yields were much higher, earnings yield was much lower because stocks were just going straight up. So let's see what stocks did in that framework. Well, if you drill down and let's look at 1995 through 1996. All right. We had a down year in 1994. So probably a good place to start the run up into the bubble. And from the end of 94 to the end of 96, stocks put in about a 65% return. That was kind of early in my career. I started to believe as a portfolio manager, started to think, well, this is the way it is. Stocks average about 20% a year. This is what's hard about this job. I started to think of that as a sacrosanct or rather that was the norm. All right. So let's say you pulled the ripcord at the end of that period. You probably would have felt justified in doing that. Of course, remember, valuations weren't very attractive. Then let's look at the next few years. If you did that. All right. You missed almost a 100% move during that period of time. If you pulled the ripcord at the end of 1996, I'm going to repeat that 100% move. So at a time when you thought markets were pretty overvalued, if you got out, you missed a hell of a ride. So let's go to our markets today. Here we are, the last three years really since the bull market started. Right. And you can see there the bear market low of late 2022. Markets looked pretty dark back then. Since then, even with the, you know, the tariffs, ups and downs, U.S. markets up about 79%. I believe that's without dividends. So it's probably even more than that. So it begs the question, do you really want to pull the ripcord right here? Okay. If you're still with me and you've decided to stay in the market, we have to get a sense of what conditions on the ground are so let's take a look at some metrics out there that we should be aware of at the beginning of an earnings season, which is started really a couple of weeks ago. In this past week, we had, you know, some of the big banks, Jp morgan, Wells Fargo, Citigroup, Bank of America, I think Goldman reported. So what do we know so far? So according to Goldman Sachs, David Kostin there, you know, top economists are of the firms that have reported so far, 61% of the firms have beaten estimates by more than a standard deviation. And that's apparently above what's typical. I think it's more like 48%. So so far, the earnings season is kicking off and we're starting starting off pretty well. This chart on your screen, maybe the most important for me because I look at, you know, estimate revisions, an important metric in the in the quantitative models I build. And as long as I see that green line, which is estimates for the S&P 500 up into the right, that's good news for me. That tells me that maybe there's still some some some gas left in the tank. I still think that this is going to be a story by story as still me a stock by stock story, because I look at my screen and I see dozens and dozens of stocks of 20, 30, 40, 50, 60%. But I also see dozens of stocks down 20, 30, 40, 50%. So obviously a very bifurcated market or the haves and the have nots. And so some stock selection here can go a long way to to to enhance returns. One of the things I focus on is, is where analysts are with the securities that they follow. And one concerning metric for me is analysts who are keeping buy ratings on stocks, yet the stock is at their their price target already. Right. So look at a few of these here. So this first one here, IBM. All right. And this is a stock I own by by the way, I own it in dividend portfolios. That top line in pop, that's the highest target out there for that some analyst has out there. The one on the bottom, of course, is the lowest target. And the one in the middle, the the orange line is is the consensus target. And the blue line is the price of IBM. And IBM is actually above the consensus target right now. Yet a lot of analysts, you know, still like this stock, another Jp morgan really going into its earnings report. It was really at the consensus target. It's a relatively expensive security, but it's probably the best bank on the planet. So I'm not sure that that being out of the stock for any period of time is going to be all that helpful. Yet you could see that even off of a pretty good earnings report, the stock really didn't react well or at least on the first day of the stock traded lower. We saw the same thing with GE was already at its target when it reported this past week. It was a fabulous quarter, but it's not cheap. It's relatively expensive and it's probably going to have to, you know, grow into, as it is, its earnings but is a pretty high quality company. And most people don't want to part with the shares, at least, at least not yet. But it was already at Target and yet it traded lower Netflix same thing. You know, there's a lot of companies out there that people look to buy that that they're hoping are going to be the next Netflix where you can buy those. You could buy Netflix, which is probably the top streamer out there, but it was trading at or above its price target on the day it reported earnings. And it wasn't a perfect quarter. And I own this stock. And I you know, I have to make a decision on whether or not I want to continue to own it, you know, and if it pulls back much further, maybe I'll have more. But I'm going to have to dig into this because one of the metrics that was was in that quarter, that was a concern, despite the fact that it is the leading platform. And so many people are watching Netflix and, you know, it's become such a profitable engine here. The one metric that was disturbing to analysts was the fact that the average viewer is watching, spending less time on the platform. And I must tell you that I find that as a consumer, even though I watch a lot of a fair amount of Netflix, I found some other platforms out there that have some pretty, you know, pretty awesome material. I think Paramount's material is fabulous. I think some of the series they've they've they've run I, I was a real fan of agency with Richard Gere. I thought that was a fabulous series. There's several others on the platform that that people are excited about lioness is a it is another and Lemon with the it's a Billy Bob Thornton yeah just fabulous series so there are choices out there and maybe that's going to weigh on on the valuation of Netflix. But analysts want to stay in love with the stock so much that it's become almost comical. Take a look. This this this one right here. This this one I love this guy's name is what is his name? I believe it's Wang Ting in the center of the page there from I believe it's SDI Securities. All right. Got a buy rating on the stock. This is the day before they reported. Yet his target was $808. All right. Several hundred dollars below where the stock is trading. So got a buy on the stocks. That's a committed analyst. He's not going to go to a sell rating even though the stock is trading, what, 400, $400 above his price target. I don't know what to say about that. So are we overly bullish? Well, yeah, maybe, but nothing changes sentiment like price, and we're certainly seeing that right now. Before we close out this week's podcast, I want to take a look at what we can expect next week, what's on deck, and let's review what's taking place so far. And earnings season is still early. Only a handful of names have we have reported. Last week we had Jp morgan, Wells Fargo, American Express, General Electric, Netflix, Goldman Sachs, a handful of other names. But of course, it is still early. So how are we doing? Well, David Kostin over at Goldman Sachs put out a note on Friday and so far pretty good. What he's reporting here is that 61% of the firms have beaten estimates by more than a standard deviation, and that's apparently well above the 48%, which is typical of four quarter. So it begs the question, how important will the Magnificent Seven be given that there's such a significant portion of the market cap of of the large cap index and what percentage of growth are they going to represent? Well, this comes from facts and of the growth we can expect this quarter. And it's not much. Right. We're talking baby maybe earnings being of 5 to 6% over last year for this quarter. 14% of that growth is going to come from the Magnificent Seven, regardless of how they perform versus the S&P 500 this year. You can see on this chart that NVIDIA has now retaken the the crown as as the largest company underneath that is Microsoft. Metta has also done well, but those are the only three that have actually beaten the S&P 500 year to date. Everybody else is bringing up the rear and two of those names bringing up the report next week. Alphabet will be first, I believe they report, I'm guessing here on Wednesday. And they're going to have to answer the question. We're going to have to get a report card on how good or bad they're doing versus open A.I., which is clearly cutting in to their search. Now, a lot of analysts talk very, very highly of of of Alphabet's, Gemini, and how they're rolling that out and weaving that through their infrastructure of products that they have. I've used Gemini, and even though I own the stock and have added to it recently, I haven't been all that impressed. I actually still prefer a catchy beat. And coming up fast is Grok. Grok is becoming very, very powerful and maybe, maybe growing the fastest out of out of out of those three. Nevertheless, we're going to get a, you know, a report on Alphabet, I believe, on Wednesday. Tesla towards the end of the week. I don't know what to say about Tesla. Everybody still trying to figure out whether this is a car company, a software company, or is it an air company. I, I guess it's going to be whatever whatever Elon wants them wants to make it. But this large cap dominance by the magnificent Seven is playing out in the market as well, because you can see the S&P 500 is hands down the winner versus mid-caps and small caps and this this trade right here, this chart we addressed on our call here at Bell Point on Thursday, why aren't small caps performing portfolio manager talking heads and analysts have been talking about about small caps taking over the market and playing a catch up trade. I've been listening to that rhetoric for the last the last three years throughout this entire bull market cycle. And it hasn't hasn't taken hold. And it was brought up on the call that maybe part of the reason is capital structure and what's taking place in the market. A lot of companies are have chosen not to go public. Companies are staying private longer. You know, in the old days, a company would need access to capital. So they go public. They probably become a small cap stock, end up in the Russell 2000 and some of these would be the next the next Amazon. They grow, become a mid-cap, then a large cap end up in the S&P 500 today. Some of these companies are staying private so long that by the time they finally come public, they're going to be, you know, massive stocks. They're going to end up in the S&P 500. I can think of two off the top of my head that will fit that bill at some point in the future. You know, certainly open. I who knows, maybe that'll come public with $100 billion, you know, valuation save for space X whenever that comes public. And it's not going to be a small company. Therefore, I think the small cap index by and large is is by and large is challenged. And I would say avoid it, stick with what's working, stick with the larger cap names. That's where the growth is. All right. That's it for this week. It's Saturday. You're going to probably see this on Sunday. I'm going to try to get the heck and get something done. And save what? Whatever is left of my weekend. I hope you have a great weekend. Don't forget, if you want to learn more about yours truly and the money, run or go to my substack site dcnelson123@substack.com. I'm David Nelson and this is the Money Runner.