Investors Must Ask This Key Question About 1999 vs. Now
Back then, we were in the Internet Boom, the U.S. was by far the dominant economic power and valuations were off the charts.
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Equities continued their relentless push upward last week as stocks posted new all-times highs again last week. Not even a much hotter-than-expected July producer price index reading could knock much, if any, momentum out of the market. Equities continue to be priced at extreme levels based on numerous and traditional valuation metrics. On S&P 500 price-to-sales ratio and Shiller price-to-earnings basis, stocks are close to the valuations reached toward the end of the Internet Boom in 1999.
On a market-cap-to-gross domestic product ratio, the current market is priced significantly above where stocks traded just before the Internet Boom turned into the Internet Bust. That downturn would slash over 80% off the value of the Nasdaq and over 40% from the S&P 500, before the market eventually bottomed late in the summer of 2002.
Much like the rally in the late 1990s, this rise in equities is largely powered by a huge paradigm shift. Stocks also have become very bifurcated, with the largest 10 equity mega caps accounting for approximately 40% of the overall market cap. But that is where the similarities to 1999 end. The economic and geopolitical backdrop in 1999 was much more supportive of equities, in retrospect.
The U.S. was the unquestioned leader of a unipolar world back in 1999. China was just entering the global trading community. The Middle Kingdom would be a key growth engine for the global economy over the next quarter century. The Baby Boomer generation were in their prime earning years and maxing out their 401(K)s with stocks. The federal government ran a small budget surplus that year and had accumulated less than $6 trillion in overall debt over 223 years as a nation. And, of course, the birth of the internet was powering significant productivity gains. The U.S. posted four-straight years of over 4% GDP growth from 1996 to 1999.
The world has flipped on its head to a large degree since then. Chinese growth is ebbing, and the free trade ethos is in dangerous jeopardy with the U.S. embracing the highest tariffs in generations. It is no longer a unipolar world, and the U.S. now has over $37 trillion in federal debt and has added more to its credit card over the past three years than total governmental obligations in 1999.
Baby Boomers are retiring at better than a 10,000 clip daily. The U.S. will be lucky to see 1.5% GDP growth this year, which will still be stronger than what Japan or Europe will post. The AI Revolution is indeed a paradigm shift but is very different from that of the development of the internet. Very few companies can afford the tens of billions of dollars needed to build out AI data centers. In addition, AI creates huge demands on the electrical grid and water tables than the build out of the internet did not.
The internet revolution displaced millions of workers in various industries like brick-and-mortar retailers. But it also created huge new enterprises like Amazon AMZN, Meta Platforms META, Alphabet GOOGL, Uber Technologies, Inc. UBER and Zillow Z, that employ millions of largely high-paid workers.
The AI revolution will power significant productivity gains and eliminate tens of millions of jobs across the developed economies. But it is currently hard to see what enterprises will come to fruition to employ those unemployed masses.
And investors should be asking themselves this question: If 1999 could not support these market valuations, are things truly "different" this time around?
At the time of publication, Jensen was long AMZN.
