Three Reasons This Is Not 1999

Keith Fitz-Gerald Mar 10, 2017
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The markets are once again flirting with all-time highs and that’s got many investors wondering if a 1999-style crash is in the works… especially when it comes to the tech-laden Nasdaq. They can’t help but shake the seemingly obvious parallels.

In reality, today’s markets are a far cry from what we saw back then and that means you’ve got to play them differently if you want to profit.

That’s what we’re going to talk about today and, as always, I’ve got an investment recommendation perfectly suited for current market conditions.

Three Reasons Not to Panic Like It’s 1999

The markets have been making new highs so regularly that many investors are losing perspective.

They’re not quite getting “sick of winning,” to paraphrase one of President Trump’s favorite campaign promises, but it appears that they’re losing sight of reality.

If you’re one of millions of investors who are thinking this way, you’re not alone. In fact, it’s perfectly normal because of something called, “recency bias.”

That’s a term meaning that your memory is picking up on cues that are based on past experience, but which ultimately lead to incorrect and very costly “conclusions” – the bulk of which are wrong.

I’ve written a lot about this over the years, so I won’t repeat that today, but will instead encourage you to check out these articles on why “perma-bears” bears sound so smart  and why pessimists never make money.

“But, Keith…” I can hear you thinking… “The possibility of a correction is very real.”

Yes, it is.

That’s nothing new.

In fact, the markets have experienced at least one correction a year on average every year since 1900, according to Deutsche Bank. Practically speaking, that means you will live through one stock market correction for every birthday you celebrate.

That sounds scary, but there’s a really important takeaway and it’s one that 99% of all investors miss.

Less than 20% of all stock market corrections turn into a bear market.

Moreover, the average correction lasts between 54-87 days, which means they’re often over right about the time everybody panics and bails out… usually just before the markets rebound.

That was the case in 2003 and again in March 2009. You can see it quite clearly in the following chart from the Investment Company Institute covering net new equity flows from 1998 to 2013.

(Click to Enlarge) Source: Investment Company Institute.

(Click to Enlarge)
Source: Investment Company Institute.

At first glance, this seems entirely justified.

Then, as now, there was a speculative blow-off in a world dominated by central bank manipulation, a huge “strike-it-rich” mentality from a string of hot IPOs based on nothing more than vaporware, and massive wealth inequality. Fears of a Chinese slowdown ran rampant in the headlines and there were two gut-wrenching selloffs, panicking policy makers who immediately “eased” rates instead of letting the markets sort things out on their own.

Yet if you look deeper, there are three reasons today’s market conditions couldn’t be more different.

  • The tech-laden Nasdaq everybody remembers isn’t so tech heavy any more. In fact, tech stocks make up less than half of the Nasdaq today versus 54% in late 1999. That means it’s more stable and less prone to catastrophic failure.

 

  • Valuations back then were dependent on what e-commerce could look like when, in fact, nobody really knew. That’s why they approached nose-bleed levels. Today, e-commerce is very well established as are the metrics used to evaluate it. Instead of Pets.com, we now have Amazon.com Inc. (NasdaqGS:AMZN), Facebook Inc. (NasdaqGS:FB), and Alibaba Group Holding Ltd. (NYSE:BABA). And;
  • There is more liquidity chasing stocks right now than at any time in recorded history. BlackRock President Rob Kapito put the figure at $70 trillion last September, but I think the figure may actually be $100 trillion or more over the next five years when you consider that almost every central bank on the planet is in an “accommodative” mood – meaning they want companies to take on more debt (and risk) as a means of generating higher revenues, more jobs, wages, and expansion.

Not all that money will go into the stock market directly, of course, but there’s no question it will wind up there one way or another over time. That’s because stock prices ultimately reflect expected earnings. Whether that’s via stimulus, financial engineering, or – gasp – actual growth is moot in today’s age of financial alchemy.

So now what?

Trying to figure out whether today’s markets are like 1999 is a distraction best left to the doom-merchants who make a living scaring the pants off you.

The first step to making money is not losing it in the first place, which is exactly what you will do if you hit the “sell” button prematurely – despite your best intentions.

Think about this logically.

If less than 20% of corrections turn into bear markets, that means 80% of corrections turn into bull markets. Again, whether this is a 1999-style blowout or something else is irrelevant.

What matters most in the pursuit of Total Wealth is that you adjust to the upside potential of modern finance. At the risk of sounding like a broken record, you want to be “in to win.”

Take technology, for example.

Tech plays a very special role in our world today.

In contrast to the widget makers of the past that we all grew up with and invested in, today’s tech companies don’t have to produce another “thing” to profit. They merely flip a switch or release a few new lines of code and BAM… there’s another $1 billion in the kitty!

The most obvious plays are longer term investments in companies we talk about frequently including Alphabet Inc. (NasdaqGS:GOOG), Facebook Inc. (NasdaqGS:FB), and Amazon.com Inc. (NasdaqGS:AMZN). They’re well-understood, possess massive research budgets, and have tremendous potential.

More immediately, though, I think you want to buy companies that are involved in cybersecurity technology if for no other reason than the public is finally beginning to catch on thanks to things like the Yahoo! Inc. (NasdaqGS:YHOO) data breach last December which compromised 1 billion user accounts, and the more recent CIA WikiLeaks Vault 7 debacle.

Here’s some data that will get your attention like it does mine:

  • Cybercrime will cost consumers a staggering $2 trillion a year by 2019, according to Juniper Research.
  • 77% of organizations have no capability to respond to critical incidents, according to NTT Com Security’s 2016 NTT Global Threat Intelligence Report. And;
  • It takes the average target 200 days to detect a breach, during which there can be billions of dollars in damage done.

My Favorite Cybersecurity Play

One of my favorite companies at the moment is one with great promise in this area: VASCO Data Security International Inc. (NasdaqGS:VDSI).

The company offers a family of services including real-time fraud identification, mobile application security, multifactor identification, and electronic signature “onboarding” to 50% of the top 100 global banks and more than 25,000 financial institutions in over 100 countries in almost every sector you can imagine where customer identification and security are paramount. That includes, for instance, Healthcare, iGaming, Financials and Government, just to name a few.

The company is trading near its 52-week low following its most recent announcement that Q4 revenue fell 6.5% year over year to $47.6 million. Market capitalization is $502.46 million as of press time.

Apparently, the markets don’t like a 64.8% gross margin and $144.2 million in the bank.

I do.

Both signal more upside for savvy investors especially when you consider the pivot management is making to become a software-based company with far more predictable and stable cash flow.

Neither of which is reflected in VASCO’s stock price today, but will be “tomorrow”…

…correction or not.

Until next time,

Keith

3 Responses to Three Reasons This Is Not 1999

  1. DC says:

    Hi Keith,

    What about the bond funds like NVG or RCS during a correction? It seems NVG keeps going lower. RCS took a hit for reducing its dividend. I keep hearing the bond market has topped and I am seeing in my own accounts the bond values dropping fast.

    DC

  2. Idrea says:

    Good question⬆

  3. Chris Dorsett says:

    Hi Keith, what’s up with EKSO it’s been plummeting lately? … do I need to sell?

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