Strategists Wonder If Stocks Are Partying Too Much Like 1999

Strategists Wonder If Stocks Are Partying Too Much Like 1999

This year is resembling 1999, the thick of the "dot-com bubble" in which hot technology stocks soared before tumbling in the early 2000s, according to Brad McMillan, chief investment officer at Commonwealth Financial.

McMillan wrote in a new report that the two years, both within periods of economic growth, have blatant parallels by five different measures and indexes — consumer confidence, business confidence, the 10-year-to-3-month Treasury yield spread, private sector job growth and the S&P 500.

All of these economic areas "look very much like they did in 1999. It's remarkable," McMillan said Thursday on CNBC's Trading Nation. "We're at the end of a long boom. People don't see it that way, but it really has been."

That doesn't necessarily mean he thinks a crash is coming. But he thinks investors should prepare for an adverse market event.

"When you live in Florida and you know hurricane season is coming, that doesn't mean you move back to Massachusetts. But it does mean you're aware of it, you plan for it, and you're prepared if something happens to it," McMillan said. "I'm not saying we have to panic, I'm just saying it's time to think about stormy weather."

He does see the potential for a recession in about a year, brought on by an environment in which the Federal Reserve is in a tightening cycle, consumer confidence is high and valuations are quite high.

McMillan noted that consumer confidence is "not as high as it was in 1999, but the path up looks similar. After several years of positive developments, people are feeling good, and they're ready to act on it," he wrote.

In examining business confidence as measured by Institute for Supply Management manufacturing data, McMillan said sentiment is even higher now than in 1999.

The spread between the 10-year and 3-month Treasury yields is also significant. Looking at the difference between short- and long-term rates is a common technique for sussing out the bond market's view of future inflation and hence future economic growth.

McMillan pointed out that private sector job growth, too, appears to be tracking the same levels of the 1990s.

"We did not get the early bump to quite the same degree, but the current growth pattern — and the slow decline in growth — looks much like the late 1990s," he wrote.

Well, what about the market?

The S&P 500 then and now has responded to all of the economic factors in similar ways, he pointed out. Stocks have enjoyed solid gains over the last several years, and particularly since the election "we've seen something of a melt-up," he wrote.

If equities investors are indeed concerned about a coming drop, adding cash to one's portfolio may be wise, McMillan said. "Having some cash can give you the confidence to ride it out," he said.

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