I like history. One can look back, see what happened, and then see how it all turned out. One can also look back and see how those at the time thought things would turn out. Although, this exercise is fun, I am careful not to “overplay” the details, in terms of predicting what is coming, but, on the other hand, I am a huge fan of finding broad historical patterns that will repeat. I believe they repeat because humans are fundamentally driven to recover from disaster and, in the process, leap the whole kit and caboodle three steps past Go. In this, it is not the specifics that matter, but the reasons for the jump.

  • As profoundly different as today’s economic backdrop might appear, the steady, fear-defying rally of 2013 to date most closely resembles that of 1995 in its rhythm and pace.

This weekend, I came across an article that piqued my interest in looking at historical patterns to see where the market is going. The above points to a pattern, but before I get into it, remember it is not about the details, rather it is the conceptual underpinning that points to market direction.

  • 1995 a tireless, gentle, seemingly effortless upward glide to a 34% one-year gain for the Standard & Poor’s 500 index.

The reason the market this year will follow the pattern above is found in the pattern similarities.

  • 1995 was the only time prior to 2013 when the S&P 500 got this far into a year without at least a 4% pullback, and in each year, the index was up about 14% as of May 8.

This is interesting, but the larger point is the reason for the “non-pullback.” As 1995 began, the US economy had just come out recession and was still in a sizeable real estate correction. Congress had just passed a huge tax increase (the largest ever) and a budget stimulation package and the Republicans told America the US debt was so huge it would destroy the economy (imagine that).

  • The U.S. federal deficit was at then-all-time highs as a proportion of the economy.
  • Washington was a snake pit, warring over budget and social issues, and Congressional Republicans would shut down the government in late ’95.

Congress and the President were at war and the wild-eyed wanderers screamed doom from the hilltops, as there was the fear that the US was headed back to recession, a constant drumbeat of the breathless media – the world was coming to an end (oh my).

  • There was an all-out “growth scare” in ’95, with U.S. GDP slipping below 1% for two straight quarters and April and May payrolls declining.

Perhaps the reasons for the fear then were the same reasons we have the breathless media still spotlighting those who scream about economic collapse today.

  • Wall Street had essentially undergone two crashes (one of stocks, the other bonds) within seven years.
  • In the spring of ’95, once Greenspan began cutting rates, we had a central bank that was essentially adding fuel to an economy and credit markets that were already gathering pace beneath the surface.
  • Risk-taking had been forcibly curtailed.

Back then, no one had any reason to believe the market would head higher. The Democrats had passed a huge tax increase, political warfare raged, the real estate market was just recovering, the Fed was intervening in the economy, the US government was regulating risk (although that would change quickly in the financial realm, but that is another story), credit was just starting to loosen again, and outside the US, the global economy looked like this.

  • Japan was struggling with an economy that could not get out of a deflationary spiral.
  • China was slowing from upper-teens growth to upper-single digits.
  • Mexico nearly defaulted on its government debt.
  • Western Europe’s economy was stalled.

Oh, here is one more thing that happened on a global scale back then and is happening now. Can anyone say “gold and oil?”

Today’s credit markets are gathering steam, as I have pointed out recently – banks are easing up on lending standards, consumers are borrowing to buy cars and houses, and small businesses are borrowing in large numbers. All of this points to another similarity to 1995- the economy is transforming, something the market is catching onto and likes.

  • The 1995 market was picking up the stirrings of massive economic advances: the commercialization of the Internet, the emergence of Asia, the democratization of finance. (Netscape would go public that year, launching the tech-stock wealth bonanza, and Charles Schwab Corp. (SCHW) started taking online accounts that year.)

The US is transforming technologically again. Evidence that the market likes this is found in the following, a bit of info that suggests the market is ready and willing to jump to new heights, and in doing so, it will embrace innovation, new technology, and a brave new world.

  • U.S. companies are on track to raise the most money through initial public offerings since before the financial crisis, driven by the same thirst for risk among investors that has pushed the stock market to new highs.

One last similarity that piques my interest and it should yours is how the market entered 1995 and 2013.

  • The S&P 500 price-to-earnings multiple had entered the year near 15 as it did this year.

Of course, we know what happened in 2000, after three years of budget surpluses, record corporate profits, unimaginable IPO prices, tremendous job growth, a booming real estate market, and a highly overvalued, in fact, inflated stock market – Congress and the President unleashed greed and it all came tumbling down. Will history repeat? Let’s look again in five years, that is, after we ride this pattern out.

Trade in the day; Invest in your life …

Trader Ed