Living the Crazy Life?
This week we harken back to the year 1999 as current market uncertainties, rising bond yields, and investor sentiment are reminiscent of a exceptionally strong period of
performance for the equity market, and its ultimate end. While no two markets are exactly the same, some of the similarities between then and now are interesting to say the least. This week we gather inspiration from the 1999 song "Livin' La Vida Loca" recorded by Ricky Martin. Here is some trivia about the song:
This song was the 2nd most popular song in 1999, spending at least 5 weeks in the No. 1 spot on the Billboard charts. It was quadruple Platinum certified, selling more than 4 million copies worldwide.
The song was written by Desmond Child and Robi Rosa. Child had previously written hit songs for Kiss, Cher, Bon Jovi, and Aerosmith. Rosa had been in the group Menudo with Ricky Martin. The song was a crossover Latin pop song that made it into the mainstream culture.
The song was the first to utilize a recording style titled, at the time, "in the box." Basically, it was one of the first songs to be digitally recorded and was noted in the New York Times as the first 100% non-analog recording.1
Child and Rosa claim that the song was heavily influenced by the music of Frank Sinatra. Child stated in an interview that the two were listening to Sinatra while they were writing the song and they were leaning into a Latin Elvis concept for Ricky.
Martin also recorded a version of the song with Spanish lyrics that was included on U.S. copies of the album titled, "Ricky Martin."
Here's what we've seen so far this week...
Upside, Inside Out. The songwriter adds this line in reference to how the singer is baffled by an irresistible woman and how his world is turned upside down. Investors might be feeling the same this week after rising bond yields are accompanying new
lows in the equity market. The yield on the 10-year Treasury increased 20 basis points this week, which is the second-highest weekly rise next to the week of May 11th of this year.2 Similar patterns have also appeared ahead of some prior market declines. Prior to the Dot.com bust, the 10-year Treasury yield increased 263 basis points from October of 1998 to January of 2000. The increase prior to the Great Financial Crisis saw the yield increase 97 basis points over just a few short months in 2007 and was about 4 months prior to the beginning of that bear market. Things were different in 2022, as the Fed raised interest rates 7 times that year to combat rising inflation resulting from the supply shocks of the COVID era. So far this year, the 10-year has risen 117 basis points since the March low. Again, no two markets are identical, so this could be a response to a more hawkish Fed, and yet, the similarities are worth noting.
At the same time, equity markets are making new lows, while the S&P 500 Advance-Decline trend has shifted. Since mid-April of 2024, the Advance-Decline line for the S&P
500 has been on an upward trend that had not been broken until late August of this year.3 Meanwhile, new lows on the New York Stock Exchange have reached levels exceeding 400 lows on a daily basis, something not seen since April of last year.4 Like the movement in yields, this pattern has also appeared ahead of some market events. In April of 1999, the S&P 500 A/D Line rolled over and new lows on the NYSE picked up over the 8 months leading up to the Dot.com bust. This too happened in October of 2007, lining up with the beginning of the Great Financial Crisis. At the end of 2021, the A/D Line broke trend and new lows on the NYSE moved higher in January of 2022. These signals have not always been followed by a bear market and past patterns may not repeat. However, it might be a good idea to watch the development in yields and new equity lows as markets grapple with inflation, the Fed, and geopolitical conflicts.
Livin' La Vida Loca? The song details the exploits of a woman living the crazy life and taking her male companions with her on the wild journey. Investors, it could be argued,
are being taken on a wild journey that we have seen before in history. According to the graph above, investors' equity allocations are at highs not seen since 2006. At the same time investor allocations to bonds, also visible in the graph, are at lows not seen since 2007. We pointed out just a few weeks ago that investors deemed asset allocation as "dead" and loaded up in equities, while dumping bonds in 1999.5 That cost investors who became one-sided in their asset allocation as the following year saw a reversal in the returns of equities and bonds. Are investors making the same mistake this time around?
For the past couple of months we have been highlighting the current level of concentration in both U.S. and global equity markets. The situation does not seem to
have changed much. If we look at the capitalization weighting of the S&P 500 Index in terms of its top two holdings, as shown in the graph, the current concentration is the highest going back to 1980. This has contributed significantly to index returns over the past two years as those stocks at the top have increased in stock price. However, as shown in the graphic, at some point, concentrations come down as markets correct to the mean - as shown in the graph above in 1983, 2001, and 2007.
A Premonition? The singer in "Livin' La Vida Loca" claims to have a premonition about the irresistible woman making him fall for her. Investors too have fallen for AI stocks
over the past few years. Rightfully so, as there is little doubt the technology is here to stay. Yet, there are questions about revenue growth and corporate financing that have investors apprehensive about the future of AI-related stocks. Since peaking in June, the Goldman Sachs AI Basket of stocks is down more than 10% as the LLM Token Expenditure Index and GPU Rental Indices (as shown in the Fidelity graph above) have declined. In other words, the revenue derived from tokens charged by commercial API AI-related tasks and the rental rates for AI models to utilize Nvidia workhorse chips are all lower. So, the question becomes will revenue grow fast enough moving forward to justify the large expenditures of AI companies on data center buildout?
As was evidenced during the Dot.com bubble, technology has over-taken the broad market in terms of capitalization. Of the top 10 names in the S&P 500 Index, 65% of the
allocation is to technology companies and six out of the 10 names are involved in the financing or buildout of AI data centers.6 According to Bloomberg, as evidenced by the graphic, 51% of the S&P 500 Index is comprised of the technology sector. So, the average S&P 500 Index ETF, if holdings are consistent with the index itself, has become similar to the makeup of a technology fund by market capitalization.6 This type of concentration could come under pressure and, as previously stated, revert to the mean at some point in time. This week, AI financing and data center buildout came into doubt as Oracle sent a "force majeure" notice on its Project Jupiter data center in New Mexico which could be delayed.7 According to Morningstar, the "force majeure" is an attempt by Oracle to protect itself from payment obligations should the project get put on hold, but could also force the ratings agency to move Oracle's bond status to "junk".7 While the article notes a change in bond status is not a certainty yet and no two markets or stocks are the same, it bears some potential resemblance to other similar situations in the past. Force majeure notices have occasionally come before broader financial stress at other companies, though circumstances vary widely. No one knows yet the full impact of Oracle's latest move, but it bears watching as AI-related stocks have come under some pressure. As we have ended our blog writings of late, now could be an opportune time for investors to evaluate their respective portfolios to determine if their individual risk tolerance is in line with current allocations.
Click here to watch the video that helped shape culture in 1999.....
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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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