January 22, 2020

So far this year, the NASDAQ Composite is up 4.64% (through Friday), but the small-stock Russell 2000 is up only 1.87%. In fact, the Russell 2000 went two weeks into the New Year before it showed any gain at all. The NASDAQ 100 is up ever sharper (+5.05%), showing how Big Buying is concentrated in the biggest tech stocks. It was the same back in 1999. While the Dow and S&P 500 had decent years – up 25.2% and 19.5%, respectively, according to The Almanac Investor – NASDAQ was up 85.6% in 1999.

Dipping a few months back into 1998, NASDAQ actually rose 256% in 17 months, while the Dow and S&P 500 didn’t even gain 50%. In those 17 months, NASDAQ gained nine times more than the Dow.

NASDAQ: The Runaway “Bubble” Index of 1999….and Now?

The NASDAQ Runaway Bubble Index of 1999 Table

This division became even more defined after the Dow peaked on January 14, 2000, while the S&P 500 kept climbing and NASDAQ soared, virtually “melting” up +19.2% in February 2000 and adding another +10.4% in the first 10 days of March. In the first 10 weeks of 2000, the indexes went opposite directions:

First 10 Weeks of 2000: NASDAQ Soars, Dow Falls

NASDAQ Soars, Dow Falls First Ten Weeks of 2000 Table

Something similar happened in the first half of April 2000. On Monday, April 3, 2000, NASDAQ collapsed by 349.15 points, the largest point drop to date and the first giant step backward in a 1,250-point (-27.4%) drop in the first two weeks of April 2000. Ironically, the Dow Jones Industrials rose exactly 300 points (OK, +300.01) on the same day NASDAQ fell 349.15, on April 3, 2000. For the first 12 days of April 2000, NASDAQ collapsed by 17.6% while the Dow Industrials rose by nearly 2%.

Now, 20 years later, the “turtle” in this fable (the Dow) is still winning the long-term race, while the “hare” (NASDAQ) is still playing catch-up, since NASDAQ still tends to fall faster than it rises:

Percent Change of Three Indices from Their 2000 Peaks Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is clearly a “tale of two markets,” with NASDAQ exploding far faster and higher, then falling even farther and faster. Recently, we see NASDAQ rising 35.2% in 2019 vs. 22.3% for the Dow, with the semiconductor index up 60.1% last year, so the same thing is beginning to happen all over again.

Here are the 11 S&P 500 sectors (and the S&P 500) since Trump was elected. One sector stands out:

Standard and Poor's 500 Sectors Performance Indices Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The brown line on top leading the pack is “Information Technology,” up 108.7% since Election Day – more than double the S&P 500 (+53.4%). There are some good fundamental reasons for that leadership but the frothy spike in the last six months may represent herd buying by the mob, fueling an “overbought” condition of certain mega-stocks and fad stocks within that category. The Dow stocks, by contrast, have lagged, even though they have thrown off higher dividends. This is what created the bifurcated market in 1999-2000, and it may be happening again. I believe this is one reason why Louis Navellier is warning against certain “bubble” stocks in NASDAQ and the high-tech world while also predicting a 40,000 Dow.

The Outlook for Stocks in an Election Year

The mention of the Year 2000 obviously brings up the question of election years. Y2K was a highly controversial election in the end, since it came down to a Supreme Court decision over “hanging chads” in the Florida ballots between George W. Bush and Al Gore, but there was no way to know that in March and April, when NASDAQ was crashing. There was actually a strong rally in the summer, when the S&P returned to its March highs (1520) during the Labor Day weekend before slipping back down in the fall.

Maybe the market didn’t care for the prospects of either Bush or Gore that year. Likewise, in 2016, the nation had to plug its nose to choose between two flawed candidates, but it was widely expected Hillary Clinton would win, and the markets were exceptionally flat regarding those expectations in 2015-16:

Standard and Poor's 500 Daily Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Many pundits predicted a market crash if Trump were elected. When it appeared Trump would win on election night around midnight, Nobel-Prize winning economist Paul Krugman filed this prediction in the New York Times: “If the question is when markets will recover, a first-pass answer is never.” It didn’t quite work out that way. The S&P 500 is up 53.4% since Trump was elected president (see chart, above).

Right now, it looks like the markets expect Donald Trump to be reelected, while analysts are predicting an S&P earnings collapse if anti-corporate zealots like Elizabeth Warren or Bernie Sanders gain the 2021 Oval Office. Legendary hedge fund analyst Paul Tudor Jones sees S&P 500 earnings plunging 25% in a Warren Presidency, with the index falling perhaps more than 25% if the P/E ratio dips lower in tandem.

Usually a President with positive economic fundamentals is a shoo-in for a second term, but this one has a “challenging personality,” to put it kindly. Still, how can voters argue with the economy of the last three years, resulting directly from pro-business policies that would likely be reversed by Warren or Sanders.

  • A CNN poll (a very anti-Trump network, by the way) shows that 76% of Americans believe the economy is “very good.” That’s 9 points above last year’s reading and the highest rating in 19 years.
  • Wages are growing four times faster than in the Obama era.
  • African Americans now have the lowest unemployment in 20 years.
  • Income percentage increases are the greatest at the lowest income levels.
  • Real median household income is at a record $66,000, after stagnating for years.

All bets are off with a Warren or Sanders presidency, but if we see either Trump or a business-friendly Democrat gain the White House, with a balance of political Party control in Congress, we should enjoy a continued bull market in 2021, along with a stronger Dow and perhaps a correction in the NASDAQ.

Source: https://www.cnn.com/2019/12/20/economy/trump-economy/index.html.
The rest of the list is from Jay Ambrose’s column in the Tribune News Service.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

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About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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