Revisiting the Year 2000 Bull Market

This week at HX Daily, we are revisiting some stock market environments from years past.

Earlier this week, we reviewed 1995. That year's performance is similar to that of 2024.

Stock market investors hope it ends up with the same finish as that was one of the best years ever for the stock market.

After thinking about 1995, we also considered what would happen in the next few years.

While 1995 was the best performance for the S&P 500 since 1958, the stock market would continue to rip through the end of 2000. It was one of the best periods ever. Here is that chart…

From January 1995 to December 1999, the S&P 500 experienced an incredible +220% or 26% compound annual return. This is double the long-term average return of the S&P 500 over the last hundred years.

One recent topic of conversation has been the relatively high valuations of technology stocks. In fact, they are the highest they have been since the early 2000s.

Many people have talked about this being a "bubble" in technology stocks and see it as a cautionary tale.

We will not argue that technology stocks are not at relatively high valuations. These may even be “bubble” levels.

We note, however, that they can go MUCH higher.

Here is a great chart from one of our investment research firms – Bespoke Investment Group.

This shows the multiple for technology stocks and how the current valuation returns to levels from the early 2000s…

The chart also shows that they can go much higher. During the 1999 Internet 1.0 technology stock bubble, valuations more than doubled from current levels.

That also happened with the expansion in earnings from technology stocks recently. Many of the technology stocks of that era had little or no earnings and were certainly not growing like what we have seen from NVIDIA Corporation (NASDAQ: NVDA).

This is an interesting observation from that period, but we had another one that we wanted to share, as many folks have forgotten about it.

Although technology stocks began to trade off in early 2000, the overall stock market held pretty well.

As technology stocks saw their multiples expand and massive rallies, the rest of the stock market performed poorly.

The spread between the performance of growth and value stocks was the highest it had ever been. Many value-focused portfolio managers (and short sellers) gave up.

There was also a big performance differential between the market capitalization-weighted S&P 500 and the equal-weighted version. Does any of this sound familiar?

Here is another great chart from Bespoke.

It shows the performance differential of the market cap-weighted version of the S&P 500 versus the equal-weighted version from 1999 to 2001.

We remember this period very vividly. Many portfolio managers who posted terrible relative performance in 1999 posted some of their BEST years in 2000.

This was because the high-valuation technology and most speculative stocks crumbled, and the cheaper stocks began to rally.

In the same way that investors had fled the rest of the market to avoid missing out on technology stocks, they now rotated out of them and into the rest of the stock market.

For the full year 2000, the market-cap-weighted S&P 500 was -9.1%, but the equal-weighted version was up more than +8%. The NASDAQ Composite was down more than -39%!

We want that to sink in—the median stock price performance of the S&P 500 was up almost double digits, while stocks on the NASDAQ were cut almost in half.

If we DO experience a true technology stock market bubble, this type of outcome is well off most investors' radar screens.

We are not saying it is likely to happen – either the technology stock bubble or the recovery in the rest of the stock market – but there is precedent.

Few will also remember that it was also really the terrible events of September 11 that plummetted us into a broader economic recession and total stock market Bear Market.

There is historical proof that the stock market can continue to work even if technology stocks deflated.

History can show us the way!