“Party over, oops out of time?” I wasn’t dreamin’ when I wrote this, but these financial markets in the U.S. are beginning to feel like 1999. Back in the 1980s musician Prince, in all his purple majesty, urged people to party like it was 1999. Strangely when that year came, people did just that, but a year later they got clobbered by a horrific hangover by way of their investment portfolios. Investors need to prepare yet again for those times because these parties weren’t meant to last.
The year 1999 presented lessons for most American investors using both stocks and bonds as their primary investment tools in saving for retirement. The year 1999 turned out to be a financial market top in the U.S. Have the lessons learned back then been forgotten by investors in 2013? If you look at today, there are a number of similarities to 1999. Back then, the Federal Reserve was printing money and using it to inject liquidity into a market system ahead of Y2K concerns. Remember that? So in 1999, the financial markets kept rising in large part due to government fiscal stimulus, which in turn lured many investors to a kind of fake bull market. Hmm, sound familiar?
It began however in the 1980s and gained more force through the quantitative easing in the 1990s. Coming out of the 90s, there was an average annual return of positive 17.6%. It actually made this time period the second best in market history, just behind the 1950s. Stocks got too expensive way ahead of their time. Many investors waited for the dot.com bubble to burst early in the year 1999, only to see it continue to rise, so they held on and even invested more heavily in the tech stocks. Everyone thought they were home free and continued to dance their fiscal lives away, but as we know they were dead wrong.
Starting in 2000, no calendar decade has seen such a dismal financial market performance in the U.S. From the end of 1999 to September 20, 2013, stocks that traded on the New York Stock Exchange have been relatively flat to down slightly factoring in inflation of 2% due to down years 2000, 2001, 2002 and 2008. The S&P 500 since 1999 has only returned .62%, less than 1%. The Nasdaq 100 when factoring in the same 2% inflation was a negative 2.7%. So the year 1999 provided many lessons and it’s our responsibility to remember them and prepare investment portfolios appropriately.
Investors would do well to remember a Cardinal rule when it comes to investing and risks that are on the horizon. When the facts change, then investors need to change their point of view. The Fed’s decision last week on the all absorbing “to taper, or not to taper” question, is one of those fact changing events. The financial market reaction was curious with the Dow and S&P 500 hitting new highs without regard to the economic growth being dismal and consumer income being extremely dull. Investors should see this bullish market action and be very wary, because stocks are overvalued in my opinion. Interest rates are rising, earnings are deteriorating, and national economic indicators remain in a downward trend. Fed Chairman Bernanke admitted these factors were troubling. Yet it would be an embarrassment for the Fed to taper and then have to “untaper.”
There is also the specter of a U.S. government shutdown on October 1 and the possibility of a default on the full faith and credit of obligations of the federal government of the United States. Investors should be concerned about this game of chicken both political parties are playing. Few can contemplate what a default on U.S. Treasuries would mean, except foreigners seem to be aware of it. Over the past 12 months, foreign purchases of U.S. Treasuries have fallen from $503 billion to just $104 billion according to a research report from Macro Mavens. So foreigners have become net sellers of U.S. Treasuries. This is not a good sign. Do they think they will get paid back in Monopoly money?
U.S. investors have complete disregard for the market and economic fundamentals. As long as the Federal Reserve remains committed to its accommodative policies, fundamentals are irrelevant. Our markets, our economy and our nation are fragile, which means investment portfolios can be in a tough position. No one can afford to be complacent about the difficulties ahead in our investment portfolios.
What Ben Bernanke did by not tapering this past week was to expose the fragility of the U.S. economy and U.S. financial markets for all to see. His inactions were proof that the U.S. economy is not capable of sustaining any reduction in the $85 billion per month of Fed stimulus – free monopoly money. Bernanke has proved that the U.S. is not the strongest country in the world and has exposed the fallacy of the economic data we have been fed by the U.S. government the last few years. Meanwhile, the markets continue to dance the night away…
I don’t think this is going to end well.