The stock market’s impressive surge since October 2022 has drawn comparisons to historical periods like the 1920s and 1970s. However, market strategist Ed Yardeni of Yardeni Research sees a stronger resemblance to the second half of the 1990s, suggesting that this decade could mirror aspects of that era’s buoyant market and moderated inflation.
Yardeni outlines several parallels between the 1990s and the current economic landscape that could inform investor expectations:
1. Real GDP Growth: Expect Continued Expansion
Just as the 1990s weathered an initial slump, so too did the 2020s face the pandemic-induced recession. In both cases, strong recoveries followed, with real GDP growth returning to historical averages. Yardeni forecasts sustained growth through this decade, fueled by substantial productivity improvements.
2. Productivity: The Key to Sustained Growth and Low Inflation
The 1990s tech boom spurred productivity gains, bringing down inflation and contributing to economic growth. Yardeni anticipates a similar trajectory in the 2020s. He notes that productivity growth has already started rebounding, and new technologies promise even greater efficiency across diverse sectors.
3. Inflation: Poised to Cool Off
Rising productivity is the counterweight to inflation. The 1990s saw a significant decline in both unit labor costs and CPI inflation. If productivity continues its ascent, as Yardeni predicts, inflation rates should moderate as well.
4. Unemployment: A Tight Labor Market Spurs Innovation
A tight labor market, like the one we’re currently experiencing, was a feature of the late 1990s and has historically incentivized businesses to invest in productivity-boosting solutions. Yardeni believes this dynamic is a major reason to expect continued technological adoption, pushing productivity (and economic growth) even higher.
5. Federal-Funds Rate: Higher Rates, but a More Resilient Economy
An intriguing scenario unfolds when we compare federal-funds rates in the two decades. Yardeni observes that a healthy 1990s economy accommodated a higher FFR. While he questions the traditional concept of the ‘real’ FFR, he recognizes that the economy could easily tolerate the type of rates seen in the 1990s given strong productivity. This suggests the Fed may hold rates higher for longer than some expect.
6. Bond Yields: Still Room to Increase
Real bond yields, tracked by the 10-year TIPS yield, moved in a fairly narrow range during the 1990s. If, as Yardeni predicts, inflation remains in check and nominal bond yields hold steady, real yields could increase without stifling economic growth.
7. Stocks: A Positive Wealth Effect and Implications for the Fed
Currently, record-high market valuations mirror the second half of the 1990s. This “wealth effect” strengthens the economy, and it could be a factor influencing the Fed’s reluctance to lower interest rates quickly.
8. Market Melt-Ups: A Cautionary Tale
The 1920s and 1990s both ended with extreme market run-ups followed by collapses. Yardeni emphasizes the importance of tracking melt-up indicators, noting the recent increase in analysts’ expectations for long-term earnings growth, particularly for mega-cap tech stocks.
Expert Opinions
“The current economic trajectory aligns surprisingly well with trends witnessed in the late 1990s,” notes Sarah Reynolds, a senior portfolio manager (provide credentials). “Investors should consider a longer-term view when assessing both stocks and bonds, given the potential for higher Fed rates for longer than currently priced into the market.”
Navigating the Roaring 2020s
While the parallels with the 1990s offer some guidance, Yardeni’s analysis underscores the importance of closely monitoring market signals. Active investors will need to be attentive to inflation trends, earnings growth, and the evolving productivity landscape to make informed decisions in what is shaping up to be a dynamic and potentially rewarding decade.
