Bob’s Journal for 8/15

Today’s Market and the Tech Stock Bubble of 2000

There are similarities between the stock indexes in 2024 and in the 2000 technology stock bubble. How close are the similarities, and are there key differences?

There’s no doubt that in 2024 investors have been enthusiastic about the stocks of a few large growth companies (primarily technology companies) just as they were for internet-related companies in 2000.

The market also has been narrow, meaning a small number of stocks account for most of the increase in the indexes.

In 2000, the technology sector was the main driver of the market and eventually was more than a quarter of the S&P 500’s capitalization.

In 2024, technology not only has been the main driver of index returns but recently accounted for well over 30% of the index.

Likewise, in both periods, 10 stocks accounted for a substantial portion of the index. Today, the 10 largest positions are 34% of the index’s capitalization.

The technology sector and the 10 largest stocks account for more of the index today than they did in 2000.

But there are significant differences between 2000 and 2024.

In 2000, the price-earnings ratio for the 10 largest stocks in the S&P 500 was over 60. The stock with the lowest P/E ratio among the top 10 was Exxon Mobil at 24.

Other stocks had substantially higher P/E ratios. NTT Docomo had a P/E ratio of 136. Cisco’s was 109 and Deutsche Telekom’s was 102.

Today’s 10 largest stocks have a P/E ratio of about 27. That’s higher than the historic average but well below the peak of 2000.

More importantly, analysts were expecting earnings growth of about 19% for the largest stocks back in 2000. So, the valuations were inconsistent with earnings projections.

Plus, those earnings projections were too optimistic. In the next five years, the companies delivered earnings growth of around 8% annually, according to investment firm GMO.

Today’s valuations of the 10 largest stocks are consistent with the earnings estimates. Perhaps some or all the stocks won’t deliver the expected earnings growth. But today’s prices are in line with the expected earnings.

In 2000, the disconnect between valuations and earnings were a clear sign of a bubble.

A related factor is that most of the stocks in today’s top 10 have delivered earnings growth comparable to the current forward projections for some time.

A number of other measures of a company’s stability and strength show that today’s top 10 are higher quality companies than the top 10 of 2000.

Today’s market leaders can’t be said to be in a bubble. There were some assets that were in bubbles coming out of the pandemic, but the Federal Reserve’s interest rate increases in 2022 popped most of those bubbles.

The market indexes are at or near historically high valuations. There’s no guarantee today’s market leaders will deliver returns that justify today’s valuations, and there’s little or no margin of safety in most of the largest stocks. But the market leaders aren’t in a bubble like the 2000 leaders were.

Beware of Rising Bank Fees

If it hasn’t happened already, you’re probably going to receive notices from your bank about upcoming fee increases.

Recently, the head of Chase Bank (part of JPMorgan Chase) said the bank is likely to start charging customers for services that have been free.

Maintenance fees for having a checking account are likely to be imposed or increased. There also might be fees for now-free services, such as credit scores and financial planning tools.

Marianne Lake, of Chase Bank, says the fees are likely to be imposed if federal regulators follow through with their plans to limit or eliminate some existing fees, such as overdraft and late fees. Banks would have to make up the revenue from other sources.

Advocates of the proposed rules say banks have threatened such actions in the past but didn’t follow through. They say there’s enough competition that some banks won’t raise fees and customers would move their accounts to those banks.

The banks have delayed the rules by lobbying and filing court cases.

But the banks also say they have plans for changes they’ll make if some or all the rules go into effect. For example, if a limit on credit card late fees becomes law, Chase says it will raise credit card interest rates and tighten its underwriting standards so that fewer people qualify for cards.

How this turns out might depend on the election results. But you should monitor communications from your bank for mentions of new fees, higher minimum balances, or additional account restrictions.

IRS Regs Let IRA Owners Switch QLACs

Recent IRS regulations increase the attractiveness of qualified longevity annuity contracts (QLACs) in IRAs.

A QLAC is a type of deferred income annuity created by IRS regulations in 2014.

In a QLAC, a traditional IRA transfers money to an insurer in return for a promise to begin paying income in the future.

The IRA owner determines when the QLAC is purchased, the date income payments will begin, and the insurer states the amount of the income.

The income payments can begin no sooner than two years after the QLAC is entered into and must begin by age 85. Once income payments begin, they last for life, no matter how long the IRA owner lives.

A special advantage of a QLAC is that the amount invested in it is ignored when computing required minimum distributions (RMDs). The QLAC is a way for an IRA owner to delay RMDs on the amount deposited in the QLAC.

The IRS wants to make QLACs, in particular, and annuities, in general, more attractive to retirement account owners.

That’s why in the recent regulations on RMDs and the SECURE Act, the IRS added a provision that said an IRA can exchange one QLAC for another without any tax consequences.

A QLAC can impose surrender fees or other transfer charges. But IRA owners don’t have to worry that there will be tax penalties for moving an IRA from one QLAC to another.

For more details about QLACs, see the August 2023 issue of Retirement Watch.

The Data

The Consumer Price Index (CPI) increased 0.2% in July after falling 0.1% in June. That brought the 12-month increase in the CPI to 2.9% through July, following a 3.0% increase through June.

The 12-month CPI has declined for four consecutive months, and July’s level is the lowest since March 2021.

The core CPI, which excludes food and energy prices, increased 0.2% in July. It had increased 0.1% in June.

Over 12 months, the core CPI rose 3.2% through July, the lowest level since April 2021, and 3.3% through June. July is the fourth consecutive month the 12-month core CPI declined.

The National Federation of Independent Business (NFIB) Small Business Optimism Index rose to 93.7 in July, the highest level since February 2022, compared with 91.5 in June.

Yet, for 31 consecutive months now the index has been below its long-term average of 98.

Inflation remains the problem identified most often as the biggest concern of small business owners. About 24% of owners said they plan to increase prices and 33% said they are boosting compensation.

The Producer Price Index (PPI) increased 0.1% in July following a 0.2% rise in June. Over 12 months, the PPI increased 2.2% through July and 2.7% through June.

After excluding prices for food, energy and trade services, the PPI increased 0.3% in July and 0.1% in June. Over 12 months, that measure of the PPI increased 3.3% through July and 3.2% through July.

New unemployment claims fell by 17,000 to 233,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.875 million from 1.869 million.

The Markets

The S&P 500 rose 3.81% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 2.01%. The Russell 2000 increased 1.75%. The All-Country World Index (excluding U.S. stocks) added 4.40%. Emerging market equities advanced 4.97%.

Long-term treasuries gained 0.71% for the week. Investment-grade bonds increased 1.01%. Treasury Inflation-Protected Securities (TIPS) added 0.34%. High-yield bonds gained 1.12%.

On the currency front, the U.S. dollar declined 0.28%.

Energy-based commodities increased 3.40%. Broader-based commodities rose 1.88%. Gold gained 3.33%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.