Tom McClellan (www.mcoscillator.com) wrote recently about the similarities between 1978/1980 oil stock bubble and the current period: “1980 was when President Reagan defeated the incumbent President Jimmy Carter to win election. Reagan's victory was both anticipated and celebrated by Wall Street, as he was seen as a ‘transformative’ candidate with the promise of solving all of the problems which faced the country then. And Reagan arguably was a transformative president, but the first two years were not a pleasant time tobe a stock investor.”
The S&P 500 Index topped out at the end of November 1980, and the subsequent December rally did not produce new highs. Also, the oil stock top was followed by the nasty 1981/82 recession, which saw unemployment soar. The US economy entered 1982 in a severe recession and labor market conditions deteriorated throughout the year. The unemployment rate, already high by historical standards at the onset of the recession in mid-1981, reached 10.8 percent at the end of 1982, higher than at any time in post-World War II history. I am bringing this up because the November 1980 stock market top preceded the beginning of the recession (July 1981) by 8 months. Finally, the largest market cap stocks at the time (mostly oil stocks) performed miserably after 1980, and the entire stock market declined until its major low in August 1982.
Clearly, there was by 1980 a colossal bubble in energy and related stocks. However, this energy bubble occurred in a relatively low valuation environment for stocks and for assets in general (except for precious metals).
The market cap as a percentage of the economy had declined since the peak in 1968 by more than 50%, and hovered around 30% of GDP. Furthermore, the US stock market was no higher than it had been in 1964. At the same time, the housing market was depressed (except in the oil producing regions of the US, notably Texas) and government debt was just $914 billion (current debt: $36 trillion). Lastly, interest rates, which had risen to around 20% in 1980/81 were about to enter a long-term declining trend.
This is now obviously different. Valuations are high and the market cap as a percentage of the economy is at a record.
Recently we noted that significant weakness had emerged among homebuilders. Equally worrisome is that financial stocks seem to be rolling over. Furthermore, of some concern to me is the fact that the KBW Bank Index (BKX) has failed to exceed its January 2022 high. As I explained in earlier reports, I consider the performance of financial stocks to be a leading indicator for the entire stock market.
Also, in the 1970s, interest rates had risen to around 20% in 1980/81, and were about to enter a long-term declining trend. This is now clearly not the case. Interest rates which declined from 1981 to 2020 seem to be in a rising trend. Now, I am not denying that in the coming economic contraction Treasuries couldn’t rally. This, especially, since speculators are heavily short Treasuries. But it is likely that interest rates have entered a secular uptrend.
Lastly, according to CNBC, “Nvidia sees ‘remarkable’ influx of retail investor dollars as traders flock to AI darling. Nearly $30 billion poured into Nvidia on balance by everyday investors this year, according to data from Vanda Research. That has made it the most-bought equity by retail traders on net in 2024, as of Dec. 17. Nvidia has seen almost double the number of net inflows from this group compared with the SPDR S&P 500 ETF Trust (SPY), which tracks the broad benchmark for the U.S. stock market. It is also on pace to dethrone Tesla, the retail investor favorite that earned the most-bought title in 2023. (The firm calculates net flows for each security by subtracting its total outflows from inflows.) Vanda data shows Nvidia has a weight of more than 10% in the typical mom-and-pop trader’s portfolio, up from just 5.5% at the start of 2024. It’s now the second largest holding of the average retail investor, sitting marginally behind Tesla.”
I have to say that I find it absolutely remarkable that just about the two priciest and speculative stocks are the largest holdings in the average retail investor’s portfolio.
My friend Kevin Duffy (duffy@bearingasset.com) wrote an essay for us in his Coffee Can Portfolio entitled, BULL IN THE CHINA SHOP - Communist, capitalist or a mixed economy, which I highly recommend. The link to the essay is here.
I wish my readers a gratifying New Year.
With kind regards
Yours sincerely
Marc Faber
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