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S&P 500 at a record high – so should we party like it’s 1999?

August 21, 2020

Where were you at the turn of the millennium? When the dot-com bubble burst?

Well on Tuesday 18 August, the S&P 500 crept up by 0.23%. It was enough to bring the reading on the index to just above the previous high that it had hit nearly six months previously, on 19 February. In between those two peaks there was a fall of 33.9% to 23 March followed by a rally of 51.5%.

The obvious question is why? The USA economy today is much less healthy – in all senses – than it was in February. In the second quarter of 2020 US GDP contracted by 9.5%, while the latest unemployment reading is 10.2%. Covid-19 cases are flatlining at around 50,000 per day and there is a Congressional logjam preventing the introduction of a second economic stimulative package to replace the $2.2trn one that expired at the end of July. Throw in for good measure a looming presidential election which the (nominally) Republican incumbent is currently on course to lose and the conditions for a raging bull market appear distinctly absent. So once again, why?

Here are some plausible answers:

Technology’s impact also shows through in the NASDAQ Composite Index, as the above graph illustrates. This has traditionally been heavily weighted to technology shares and is up 25% this year (against 5% for the S&P 500).

The Federal Reserve, in common with other central banks, has not only made money cheap to borrow, but has also thrown vast quantities of cash into the markets to prevent them locking up. The Fed’s balance sheet has expanded from $4.2trn at the start of the year to just shy of $7trn now.

The UK for that matter has just exceeded $2trn!

All other things being equal – a dangerous proviso at the best of times – lower interest rates increase the value of shares because the income they produce is discounted at a lower interest rate. The historic earnings yield on the S&P 500 is now 3.43% against 4.32% at the start of the year.


Tuesday’s peaks for the S&P 500 and NASDAQ prompted a number of comments from those who remember the technology boom of 1999. However, this time around the technology companies in focus are making money, not burning it.