What If It’s the 1990s All Over Again?

The 1990s were fun.

The internet was new, as was high-end coffee for most Americans.

You can say what you want about Starbucks, but do you even remember what pre-1990s canned Folgers tasted like? They wouldn’t serve that to prisoners on death row today. It would be inhumane!

The Cold War had just ended, gasoline was dirt cheap, and rock music was in the midst of its most creative decade since the 1960s.

The federal budget was balanced for the first (and last) time in decades. And, best of all, we had the turn of the millennium to look forward to.

So, yes, the 1990s were fun…

But the most fun of all was to be had in the stock market. It was the biggest stock bubble since the Roaring 1920s, and cheap online brokers made the market accessible to the masses. A lot of people got rich in the 1990s…

Let’s flash forward to today. After eight years of nearly uninterrupted bull market, it’s starting to feel a little like the late 1990s again.

To show you what I mean, let’s take a look at the Cyclically-Adjusted Price/Earnings Ratio (CAPE), or the Shiller P/E, named after Yale professor and economist Robert Shiller. The CAPE compares current S&P 500 stock prices to a 10-year average of companies’ earnings.

Today, the S&P 500 sits at a CAPE of just over 30, putting it at the level of 1929… right before the Great Crash. The CAPE has only been more expensive one time in the entire history of the stock market: the 1990s tech bubble, when it topped out at 44.

To put that in perspective, today’s CAPE is 83% higher than the long-term average…

Of course, before the CAPE hit 44 at the end of 1999, it had to pass through 30. That happened in mid-1997. So, for nearly two and a half more years, the market went from being “crazy expensive” to “even crazier expensive.”

I written for over two years now (see “Flat Returns for the Next 8 Years?”) that stocks are not priced to deliver good returns over the next decade. In fact, if history is any guide, they’re priced to lose money.

But that doesn’t mean they can’t go higher first.

So, what if…

What if we have a repeat of the 1990s and stocks just keep getting more expensive for another couple of years?

Sure, it would be irrational. But it was irrational back in the ‘90s too, and yet it still happened. And it would be just like Mr. Market to do what no one expects him to.

So, again… what if?

Should we just throw all caution to the wind, and buy and hold on for dear life?

Well, you could do that, but I wouldn’t recommend it. After all, we all know how the 1990s bubble ended. The tech bubble burst, and in the ensuing bear market the S&P 500 lost more than half its value.

My recommendation is to ride the market higher but keep your stops relatively tight. That’s the approach I’m taking in both Boom & Bust and Peak Income, and it’s working.

As I write, four positions in the former are sitting on double-digit gains, including one with over a 70% profit. In the latter four of our 22 income-generating positions have gained more than 19%, with six others in double-digits.

I’m talking about total returns, which include dividends, rather than just price returns. Whether the market goes up, down, or sideways from here, getting paid a regular stream of dividend income can help smooth out your returns.

And, perhaps most importantly in these market conditions, try taking a more nimble approach to your trading.

Adopt a strategy that can make money whether the market goes up, down or sideways, and gives you an opportunity to profit from any sudden changes. That’s where my friend Lance comes into play.

He’s got a solution to my “What if?” scenario, whether I’m right and it’s the 1990s all over again, or even if I’m wrong. Click here to sign up for his special event next week where he’ll explain all the details.

Charles Sizemore
Editor, Peak Income

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Categories: Stocks

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.