This week in the markets: hearing the echoes of 1999

For those investors old enough to remember the dot.com bubble of the late 1990s, there are more echoes in today’s markets than they might be comfortable with. The surging value of tech stocks 25 years ago was exciting while it lasted, but the bursting of the bubble was painful. 

Party like its 1999 

The value of Nvidia, the poster child of the AI investment boom, has risen by 50% so far in 2024. And it’s not yet the end of February! Three stocks account for half the gain of the S&P 500 year to date. Seven companies represent a quarter of the value of the whole stock market. 

It all feels a bit dot.commy. Memories are being stirred of the last time markets soared on the back of hopes for a ‘paradigm shift’, a fundamental change in the global economy. Back then it was the rapid adoption of the internet that got investors excited. Today it is artificial intelligence. Then as now, fundamental valuations measures were abandoned as FOMO (fear of missing out) and blue-sky thinking kicked in. Nvidia now trades on 100 times historic earnings. 

But, in reality, we are probably still some way off the peak in the AI mania, if that is what it is. Share prices are still in large part justified by earnings differentials. The top 50 shares in the US trade on around 28 times historic earnings compared with 21 for the remaining 450 shares in the blue-chip index. In 1999, as in the early 1970s, the premium was around 90%, not 33% as it is today. 

So, if the so-called Magnificent Seven can continue to deliver better than expected earnings, maybe their share prices can continue to outperform. This week we get another important update, as Nvidia announces its quarterly earnings. 

Meanwhile over at the Fed 

The other big driver of markets at the moment is interest rates. And here too we will get some new information this week as the Federal Reserve publishes the minutes of its most recent rate-setting meeting. Rates were left unchanged at between 5.25% and 5.5% then, and Fed chair Jerome Powell restated his long-standing view that markets have got a bit ahead of themselves in expecting half a dozen rate cuts this year. 

The Fed’s view is that just three quarter-point rate cuts are likely, and slowly investors seem to be coming round to that point of view. The futures markets are still pointing to interest rates of 3.7% next year but the 10-year Treasury bond is now yielding 4.28%, suggesting that while rates are about to pivot lower the rate of easing may not be that rapid. 

That’s good news for investors who may have missed a brief spike in bond yields to over 5% in October. They can still lock in a decent yield and look forward to some capital gain too as rates continue to normalise. Bonds remain an interesting diversifier in a balanced portfolio. As, for the time being, does cash, with money market funds offering a yield of around 5% with little risk to capital. 

No bulls in the China shop 

For more enterprising investors, the 43% slide in the Chinese CSI 300 index since the 2021 peak offers a contrarian buying opportunity. But few overseas investors are taking advantage. Instead, they are piling into other, seemingly safer, ways of playing a potential bounce back for the troubled Chinese economy. 

With the Chinese stock market trading on just nine times expected earnings, half the multiple of the US market, shares in Shanghai and Shenzhen might seem an obvious contrarian play. But investors are preferring to buy shares in European stocks with a Chinese exposure - the likes of luxury goods and cars. LVMH is up 9% this year and Hermes has risen by 12%. Mercedes is 7% higher and Volkswagen is up by 14% year to date. 

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