The S&P/TSX Composite Index is up more than 26 per cent year-over-year.Tijana Martin/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Is it 1999 all over again in the markets?
The economy may be in recession, but if you’re invested in stocks, things have seldom been better. American markets dipped on Friday with the escalating trade war between the United States and China. But on Monday they parred back most losses as rhetoric cooled. The S&P 500 Index is still up more than 13 per cent year over year.
In Canada it’s even better. With the S&P/TSX Composite Index up more than 20 per cent year-over-year, a twenty-something living at home and socking money into shares can look forward to retiring at 40. Housing bubble? That’s so 2020.
And the prospects for 2026 are more of the same. Analysts are now predicting that the S&P500 could hit 9,000 next year. Helping to drive the rally is the increasing popularity of passive investment funds, which just follow the market and so reinforce existing momentum. And with the U.S. market actually underperforming the rest of the world, returns elsewhere will probably be even better.
That’s because the world is awash with money, its biggest economies flooded with cash by free-spending governments and laid-back central banks. Government debt is surging in the U.S. and China as governments there try to boost their economies. The election of a new prime minister in Japan has further raised the prospects of stimulus in that country, thus encouraging investors and banks to loosen their purse strings.
Opinion: The markets will burn as Trump fiddles with the Fed
Equally, there’s a growing expectation among investors that France’s political crisis will cause the European Central Bank to once again do “whatever it takes” to rescue the euro, printing money in order to keep French bonds from collapsing. Across Europe, populist parties snap at the heels of governments and promise lavish spending if they take office. That’s making it hard for governments to rein in spending and causing some to open the taps, especially in Germany.
Despite this, monetary policy almost everywhere in the developing world remains fairly easy. Rather than raise interest rates to keep inflation low, most central banks are holding pat or even cutting, anxious not to slow economic growth.
Therein lies the paradox: Markets are soaring but aren’t dragging economies along with them, and central bankers are caught in the middle. With central banks thus unwilling to defend the value of their currencies, investment banks are starting to advise clients to go all in on the “debasement trade”: buying assets, any assets, fast before the value of money declines.
This market mania is causing ever more analysts to draw parallels with 1999, the final year of the dot-com bubble, when the Nasdaq rose nearly 50 per cent before finally crashing. With AI stocks dragging markets to all-time highs, we may be in the early stages of the final melt-up before the mother of all crashes.
There are vital differences between today and 1999. The rally may be more sustainable: AI companies are actually making things, such as chips and data centres, whereas many of the dot-com companies were little more than promises.
However, the fallout from a crash, if it happens, could be worse. That’s because in 1999 the governments of the big economies carried far less debt. The U.S. national debt was less than half what it is today, and its budget was in surplus, leaving the government with ample resources to fight a recession. This time around, public finances are so stretched that any further spending increases will drive interest rates up.
In 1999, meanwhile, everyone joined the party. The economy was booming, and everyone was spending. I happened to be living in Washington at the peak of the boom, and the bars, restaurants and malls were packed.
This time around, half the spending is being done by the top 10 per cent of earners, leaving the majority feeling worse off because of inflation, slowing wage growth and a sluggish job market.
Unhappiness over this state of affairs is particularly strong among young people. The suicide rate in the U.S. has risen more than 50 per cent between 1999 and today, driven by higher youth rates. Here in Canada, research has also tracked a sharp drop in happiness among young people, driven largely by the high cost of living.
One manifestation of this discontent among the young has been a rising support for more radical political movements and parties, of both the left and the right. Across the developed world, right- and left-wing populists are squeezing out the political centre.
So whereas the 2000 U.S. election was a civilized affair conducted over how to spend the emerging massive government surplus – whether to spend it on Social Security or tax cuts – future elections will likely be fought over defining the enemy.
The stock market party thus hides an underlying reality: This boom may be on borrowed time, and the bill keeps rising. When it comes due, the reckoning over who should pay it could be harsher than in the past. No wonder the price of gold keeps rising by the day.