The 2000s Versus Now!

As worry spreads about the rise and fall of market bubbles, which are notoriously difficult to define, we are getting questions about whether these price moves really count as “bubbles,” poised to pop. As bubbles peak, they combine signs of excess — prices rising much faster than earnings can justify — with symptoms of mania, like frenzied trading and borrowing. To some analysts, the entire U.S. stock market looks bubbly, given its dizzying run-up. But earnings growth has also been extraordinarily strong through the pandemic. The current risk is not so much of broad bubbles but of narrow bubblets in specific assets and corners of the market. In this newsletter, we focus on the large/mega company stocks today, versus the tech bubble in Year 2000.

Here is a look at the 10 largest S&P 500 companies as of March 31, 2000 (price adjusted for splits). You will remember some of these names as they were the darling investments of their time. We also look at where these stocks are today:

Key observations from the data above:

1. During the bubble rise, most of these mega companies had an astronimical price rise, for example, Intel went from $5.30 in March 1995 to $65.959 in March of 2000!.
2. Such amazing returns, means that these companies enjoyed investor enthusiasm and many of these stocks were widely held by investors in early 2000s.
3. What happened to these stocks in the preceding decades is reflected in the last column. 5 of the Top 10 stocks are still trading below their price of over 20 years ago. This is a key point as we look at the winners in the market today.
4. In the last 20 years, the stock market has seen strong returns and yet these names are not the star performers. AIG would not have existed without government support.
5. Only 1 of these stocks, Microsoft, has beaten the market (S&P 500) since early 2000, but even that statistic is misleading. If you chart the price of Microsoft stock, you will see that it did not get back to its March 2000 price until mid- 2015 (15 years later!).

Given that backdrop, let us look at the Top 10 largest stocks in the S&P 500 index today:

Key insights:

1. Many of the stocks listed above have also enjoyed strong price performance in recent years and a lot of enthusiasm from investors. (Does Tesla remind you of any stock from Year 2000? Maybe Intel?)
2. While the future is unknown could we get any clues from the past? Of course, past performance does not reflect future results. How many of these stocks will outperform the broad market in the decades to come?
3. Do you believe these stocks can continue their dominance?

We continue to believe that a disciplined diversified investment approach presents the best path towards risk adjusted long term returns. It is important to remember that a bubble is often a good idea gone too far. In the early 2000s, the conventional wisdom was that the dotcom bubble had fueled mainly junk companies. Later researchers found that, compared with other bubbles, those in the tech sector produce many startups that fail but also help launch major innovations. For every few dozen dotcom flameouts, there was a giant survivor like Google or Amazon that would go on to make the economy more productive. Similarly, the tech trends that accelerated during the pandemic, from teleconferencing to online learning, will help increase productivity for long after the pandemic passes.

We hope this discussion provides some food for thought and an antidote to the allure of latest investment frenzy. We are a firm believer in the power and purpose of diversification – at a portfolio level, at a asset class level and at a fund level. We invest in diverse asset classes with the goal of
protecting your portfolio from various potential outcomes rather than relying on the outcome of a single stock. We see diversification as a tool for generating investment growth while protecting your portfolio against a variety of known and unknown risks. After all, what often hurts investors most is the risks they have but don’t know that they have.

Disclosures:
Data from Yahoo Finance, FactSet, Russell, AMG, Renaissance Management. Past performance does not predict future returns. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision, nor should it be considered a recommendation. The views and opinions expressed are those of the company at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.