Stock Market—Parallel between 2023 and 2001

Video 1. What to Expect in 2023 - Stanley Druckenmiller's Market Prediction (YouTube link) 

What Stock Market Happened in 2000?

During June 2022 interview at Sohn Investment Conference, Stan Druckenmiller describes how after FOMOing into equities near March 2000 peak, he quickly lost ~$2-3 billion and went on multi-month vacation.  

Figure 1.  S&P 500 price from 1996 to 2009 (Courtesy: Yahoo Finance)

Upon his Sep 2000 return, in Druckenmiller's words: "I open newspaper and can't believe it. NASDAQ has recovered like 70-80% of losses and S&P 500 is almost back to its highs. 

But oil, interest rates, & dollar are up...this has always been terrible for earnings looking forward."

In the interview, Druckenmiller proceeds to describe how he bought Treasuries and made 40% in Q4 2000 betting that the US would go into a recession.

After the above history shared by @MessinaLadder, he had commented that:

My bet is that while the periods are not completely analogous, the current setup for $SPX has more in common with what Druckenmiller was looking at in late 2000.

Figure 2.  ARKK price from 2020 to 2022 (Courtesy: stockcharts.com)

Figure 3.  NASDAQ price from 1998 to 2002 (Courtesy: Bloomberg)

Parallel between 2023 and 2001

Based on @MacroAlf, he had also commented on 11/13/2022 that:

The evidence is pretty compelling: 2023 might well resemble 2001. There are 4 main parallels between now and then, and they relate: 

1. Excessive animal spirits
• Tech bubble in 2000 (Fig. 2) vs ARKK MEME ETF in 2020 (Fig. 3)
• This is the first clear similarity between 2001 and 2023: they both follow periods of excessive risk taking and the subsequent rapid unwinding which leaves important scars amongst investors.
2. Inflation
3. A ''tight for long'' Fed stance^[3]
4. Macro indicators pointing south
   

Closing Remarks

Finally, as Ayesha Tariq has pointed out the market of the past week is completely in “risk-on” mode. And most major technical momentum indicators are now bullish.^[2]

But under the surface, not much has changed.

• We still have mortgage rates at over 7% and next week’s housing data probably won’t come in with great numbers. We also had DR Horton report earlier this week confirming that the housing market isn’t doing well. The guided to an additional 20-25% order cancellations in the next quarter.
• The YoY inflation numbers came down but, the MoM numbers are still increasing. This is not particularly encouraging where you want to see prices actually reversing.
• Even if the Fed decides to reduce the size of the hike to 50bps, it’s still a hike! Not a cut, and QT doesn’t stop.
• If history is any guide, the Dollar peaks and begins to weaken once activity has bottomed, the Fed is easing and global growth starts recovering. None of this is true, right now.
• Finally, we have the ominous yield curve which is still -0.51% (10Y-2Y inverted). The Yield Curve starts to correct in a recession.

 

References

1. Stock Investment: Risk-On vs Risk-Off
2. The Weekend Edition # 64 (Banking on the market)
3. A ''tight for long'' Fed stance (@MacroAlf)
• The bond market is getting around this idea that the Fed won't massively pivot, but it will instead apply a very long pause.
• Market-implied Fed Funds are now seen peaking at 4.9% in 6 months and than to stay in the 4-4.5% range between Q2-23 and Q1-24.