Historic comparisons can be a helpful way to view the market, but it is important to remember that market conditions are never exactly the same. As the saying goes, history doesn't repeat but it does rhyme.
Anyone who was trading twenty years ago would note some similarities between the price action back then and what we are seeing now. The main driving force in 1999-2000 was the internet bubble, where valuations were often based on factors like the number of clicks a website would receive. In the current economy, there isn't anything fundamentally similar to the way the internet was developing back then, but what is very similar is the role that liquidity is playing in the market action.
In 1999, there was great concern about what was known as Y2K. Many computer programs that were in use were not set up to deal with the shift in the date in computer code from 99 to 00. The fear was that 00 would be read as 1900 rather than 2000 and cause chaos in many industries -- especially finance. Well known market strategist Ed Yardeni started predicting in 1998 that Y2K would cause a global recession.
The Fed took this concern very seriously and dealt with it by creating a flood of liquidity. Many people were withdrawing large amounts of cash from their bank accounts due to fears that ATMs and the banking system would be corrupted by Y2K problems and the Fed wanted to make sure there was ample liquidity.
The cash that the Fed injected found its way into the stock market to a great degree. The combination of the internet boom and cheap cash fueled a huge bubble. In the first days of the new year, there was widespread relief that Y2K had been a complete dud. There were no major problems and that helped the S&P 500 jump higher in the early days of January 2000.
There is nothing like the euphoria of the internet bubble now and sentiment is not even close to what it was back then, but the injection of liquidity by the Fed is very similar. This time the issue is the Repo market and it has led to a huge amount of liquidity that has been pouring into stocks. The Fed-created liquidity is supposed to start to slow, but even with the indices hitting new all-time highs, there is still plenty of liquidity with no place to go but into the market.
While this is an interesting historic comparison, it is not very helpful as far as timing what the market might do in the near term. Back in 2000, the bubble continued to run for several months after the calendar had turned, and it wasn't until late March that the S&P 500 finally topped.
The important historic lesson is that the power of liquidity combined with a positive narrative can create tremendous upside momentum. There simply is no way to accurately time when a top might form. It is safe to predict that a major correction will eventually occur, but precise timing is impossible and that is what is so challenging.
We can either sit and wait for the day of reckoning that may not occur for months or we can try to navigate in the short term and make some money. I prefer the latter, which is why I'm continuing to look for stocks to buy rather than to try to guess at turning points.
We have more positive action this morning as the indices push deeper into all-time high territory.