Technology was the best performing sector in the five years prior to the 2000-2002 stock market bear. The acceleration of dot-com mania created a boom-to-bust scenario that few had ever seen. Yet “tech” actually weakened before other segments of the economy. What’s more, corporate shares of technology companies witnessed far more violent sell-offs than stock shares of other sectors.
Financial corporations led the bull market advance in the five years prior to the 2007-2009 collapse. Questionable underwriting practices fueled a frantic housing balloon. Banks and insurers that had been runaway performers in the uptrend suddenly began to reverse their direction. Indeed, the financial sector actually buckled months in advance of other sectors. Eventually, the drag of financials overwhelmed stocks from every other segment.
The recent past demonstrates that human beings often become too enamored too easily. Investors in the late 1990s were willing to pay exorbitant prices for any company with ties to the Internet, irrespective of revenue and profitability. In the 2000s, people were willing to do anything to acquire property, even if the property cost 40% more to own than to rent.
Granted, the last two bear markets punished the irrational exuberance of individuals as well as entities. It happened in “tech.” It happened to lenders and insurers. However, is there any reason to believe that a single sector has gotten so far out of whack that the 2009-2014 bull market might be jeopardized?
If there is a “bubble” this time around, one would have to take a look at consumer credit. Some folks believe that the record levels of credit used to acquire non-investment products and services is an indication of confidence. Others feel that stagnation in wage growth coupled with the rapid decline of workers in the workforce is a signal of an unhealthy reliance on credit.
I agree with the latter.
The central bank of the United States (a.k.a. “the Federal Reserve”) has been successful in persuading Americans to borrow and spend at exceptionally low interest rates. In fact, the best performing stock sector over the last five years is the consumer discretionary segment. SPDR Select Consumer Discretionary (XLY) is up roughly 194%, far outpacing the next closest performer, SPDR Select Sector Industrials (XLI) at 155%. SPDR S&P 500 Trust (SPY)? 125%.