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  • Scott Poore, AIF, AWMA, APMA

I Remember You

Some investors still feel the sting of the Dot.com bust in 2000. So much so, that the current market environment is being compared daily to that market bubble. But is it really the same?

The inspiration for this week's musings is the 1989 hit song, "I Remember You" by the group Skid Row. The genre of music that this represents has many names - Glam Metal, Hair Band Rock, Power Metal, and Arena Rock. Here's some trivia about the song:

  • This power ballad peaked at #6 on the billboard charts in the U.S. and was easily the band's most successful commercially. The song sold more than 500,000 copies, reaching "gold" status. The self-titled album was certified 5x platinum (5 million copies).

  • The song was written by Skid Row bassist Rachel Bolan and guitarist Dave "Snake" Sabo (don't you love it when a rocker has a name like "snake"?). It was about a guy who can't let go of the memory of his former girlfriend. He spends his nights sleepless as he obsesses over her (more on that later).

  • The song is powered by the blistering vocals of lead singer Sebastian Bach, who grew up under the hardship of homelessness. He had a talent for channeling those frustrations in his vocals.

  • The band had a tumultuous relationship as several incidents with crowds during live performances and incidents among the band members in the recording studio eventually led to the band's demise.


"I paint a picture of the days gone by

When love went blind and you would make me see

I'd stare a lifetime into your eyes

So that I knew that you were there for me

Time after time you there for me


Remember yesterday, walking hand in hand

Love letters in the sand, I remember you

Through the sleepless nights through every endless day

I'd want to hear you say, I remember you oh oh"


Here's what we've seen so far this week...


Remember Yesterday. The last few Market Musings have dealt with different metrics that show our current market environment is just not like the '08 Financial Crisis, nor the '00 Tech Bubble, at least not yet. However, that hasn't stopped many commentators from making the comparisons. Like Sebastian Bach, they just can't seem to move on from yester-year.


There is much consternation among market pundits about credit card debt lately. If we look at the leverage being employed by consumers, the picture looks like less than the '08 Financial Crisis and about the same as pre-Covid levels. The top debt categories as a percentage of disposable income - Mortgages, Student Loans, Auto Loans, Credit Cards, & HELOCs - are all lower or close to even with pre-COVID levels. But, more importantly, all categories are lower from '07/'08 levels, with the exception of Student Loans (which are actually down from 2020). One category that sticks out is HELOCs. Current HELOC debt versus disposable income is one-third the level it was in 2007. Consumers don't seem to be over-levered given current income levels.


When we look at valuations, we see a different picture today versus the Tech Bubble of 2000. Forward P/Es on the S&P 500 Index were close to 25x in 1999 and 2000 prior to the market crash. Today, levels are elevated, but just above 20x. In addition, forward P/E levels were much lower in 2007, primarily due to the fact that underlying debt was the issue in '07 versus over-valued stocks in '00. In other words, not every market peak is the same.



Lastly, if we look at market cycles, we can see that bear markets usually happen in somewhat of a pattern. If we were to have another bear market in 2024, that would make 3 bears in a 5-year period (including 2020 & 2022). While not impossible, it is rather rare. Since 1928, there have been only two periods ('29 to '33 and '38 to '42) where at least 3 bear markets occurred in a 5 year-period. Since 1942, we have not seen 3 bears in a 5-year period. So, while it's not impossible, it would be statistically unlikely for a bear market to occur this year or violate an 80-plus year historical average.


Paint A Picture Of The Days Gone By. The inflation numbers sent stocks into a tizzy this week as the numbers for January were slightly higher than expected. This has more to do with markets having unrealistic rate cut expectations than inflation showing evidence of heating up.


While the month-over-month reading for both CPI and PPI was higher, the year-over-year numbers were steady. If we're going to paint a picture of prior inflation periods, we need to look further past just the last couple of years. The historical average for inflation is 3.5%, going back to 1948. CPI has been rather steady since hitting a low in June of last year. The reality is that markets have had to adjust from expecting a Fed rate cut in May (now only a 29% probability) to a 50:50 probability of a rate cut in June.


January's higher CPI print could also be due to some seasonality. January typically sees a higher print relative to the rest of the calendar year. Ryan Detrick, of Carson Investment Research, has compared the monthly change in CPI and it shows that six of the last 7 CPI prints in January were out-sized relative to the rest of the year. In addition, Goldman Sachs believes the January CPI print "largely reflected the star-of-year price increases for labor-reliant categories such as medical services, car insurance & repair, and daycare. We'll see if Goldman is correct and if the previous inflation trend returns to the prior months' trend.


More comparisons are being made to the 2008 Financial Crisis as pundits attempt to paint the picture that Commercial Real Estate (CRE) delinquencies are on the rise. I share the concerns over CRE and the new paradigm shift of hybrid office space. However, I don't believe we are at the point of concern just yet. Delinquencies on CRE loans are running at half the rate they were measured in early 2008. This is a trend that should be watched carefully, but it is likely the small banks pose the most concern as the larger banks, as a percentage of debt, have low exposure to CRE loans.



In addition, FDIC banks with CRE exposure are mostly above regulatory guidance levels. While most of the market action this week has been a bit too reactionary, it does begin to look like we could see some seasonality with regard to risk and the potential for a pullback. Late February to early March typically sees a spike in the VIX (volatility) and would be the premise for a pullback in equities. However, even if the VIX were to follow the seasonal average, the increase would be equivalent to a 30% rise, which would put the VIX at a level close to 18, which is still below the historical average of 19.5. Unless risk parameters change and underlying economic data shifts, a pullback in equities would likely be a buying opportunity for longer-term investors.


Here's the hit by Skid Row...


 

Disclosures


The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.


Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.


Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.


Past Performance does not guarantee future results.

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