Urban Carmel | Sep 21, 2014 03:57AM ET
A recurring meme in the stock market is that retail investors today are not as enamored with equities as they were in the late 1990s. The softly spoken corollary is that until we see that level of euphoria, stocks will continue to rise unabated.
If you missed the 1990s, here are two personal anecdotes to describe what it was like:
1. Online trading services like E-Trade were brand new. Our firm was hired to advise one such company in 1998. During the course of several focus groups, former policemen and teachers described how they had left their jobs to day trade. But it wasn't just their own capital; they were also trading the savings and retirement accounts of their neighbors and family members.
2. In late 1999, we sat down with the CEO of mid-sized technology firm in Silicon Valley. As the meeting started, the CEO bought stock. Two hours later, he sold for more than a million dollar gain. The next week he used that money to pay 30% over the ask for a $4 million property in Atherton. He razed the nearly new house on the lot three months later.
Imagine this: the NASDAQ nearly tripled between 1996 and 1998. Then, in the next 18 months, it quadrupled. How do you think that impacted investor psychology?
That was the investment climate attracting former policemen and teachers to day trading. In comparison, the market's 60% rise since the start of 2013 seems rather drab.
There was a legendary IPO frenzy in the late 90s. Theglobe.com went public in November 1998 at a price of $9. On the first day, it traded up to $97. Side note: by 2000, it was trading at 10 cents.
In the prior 120 years, company valuations had never exceeded 30x earnings (CAPE). In 2000, valuations were a full 50% higher than this prior peak. Valuations based on sales and balance sheets tell a similar tale.
That is quite different from today. China is slowing and Europe is mired in a no-growth environment bordering on deflation. The highly touted single currency is increasingly viewed as an albatross.
Moreover, its probably fair to say that the combination of political and demographic events, in both the US and abroad, make the late 90s unique. As a yardstick for what constitutes investor enthusiasm, it's probably not very useful.
So the psychology of the market feels very different than in the 90s. That is not to say that investors are currently unenthusiastic towards equities.
Forget about sentiment surveys. Using data from the Fed, US household ownership of stocks was 35% of their financial assets at the end of June. To put that in perspective, since 1945, it has only been higher in 1999 and part of 2000. Investors may not be managing their neighbors IRAs but their ownership of stocks has rarely been higher.
Their use of debt to fund share purchases exceeds that of 2000 on both a dollar basis and, more importantly, as a proportion of market capitalization. Yes, margin debt might increase further but its hard to argue investors have not yet embraced the equity culture.
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