Advisors Ignore the Lessons of 2000 at Their Own Risk

There are too many similarities for advisors to ignore.

There are two types of financial advisors: those who advised clients as fiduciaries during the dot-com bubble era from the late 1990s through 2003, and those who didn’t.

The latter group is not at all at a disadvantage; that is, unless they make the mistake of ignoring the lessons of that era.

Much has been written about that era in comparison to the financial market environment we have currently. But just as quickly we can point out that there is something akin to a cottage industry in drawing parallels to past periods of market declines. Still, the list of similarities between late 2024 and late 2000 are too many to simply pass by.

As those advisors (and former advisors like me) who lived through the busting of the bubble are quick to remind contemporary market-watchers: Just because something walks like a duck and quacks like a duck, doesn’t definitely mean it is a duck.

More importantly, when it comes to the emotions and herd mentality of an unwinding of a period of excess, ducking for cover too late can be a practice-crusher.

ETFs: Transparency Is King and Queen 

For ETF investors, this is an inescapable consideration. Equity ETFs are baskets of stocks. That means shareholders own the entire basket. So now as much as ever, knowing what is in those baskets is something to be aware of now, not after things start to go haywire. Fortunately, the vast majority of ETFs are highly transparent vehicles and so every day an investor can see what they hold.

Here's a short (well, maybe not so short) list of conditions that veteran advisors can highlight to clients to at least cover themselves and potentially confront the potential that some ugly market history is repeating itself.

Eight Ways 2024 Recalls 2000 

1. The Nasdaq Composite index gained more than 500% from the start of 1995 through March 2000, the bubble top. The Invesco QQQ Trust ETF (QQQ), which didn’t debut until 1999, gained over 300% from the start of 2017 through mid-July of this year, though the “Magnificent Seven” stocks did even better than that. 
2. Valuations for the largest stocks are at levels not often seen in history. And some are dismissing that based on prospective future earnings growth, with some gaudy assumptions. 
3. As a result, the S&P 500 has become extremely concentrated, or “top-heavy” with a small number of stocks dwarfing the rest of the market, just as was the case in 2000. 
4. The internet was in the early stages of changing our lives, just as artificial intelligence is now expected to do. But as it turned out, for every huge winner from that prior era, there were many companies that did not thrive, or even survive. 
5. These newer companies were seemingly everywhere: Super Bowl ads, naming rights on stadiums, etc. 
6. The number of retail investors mushroomed, and investment “experts” of all types were there to greet and sell to them. This led to a period in which the perceived value of professional advice and investment management was downgraded in the eyes of many. After all, one could just buy the popular stocks and hold forever. 
7. Fed Chair Alan Greenspan and his board raised interest rates several times prior to the market top. They reversed course and started to lower them in mid-2000, as the market was just starting its descent.
8. A market darling was suddenly stopped in its tracks by reports of accounting manipulation. Back then it was MicroStrategy. Recently, Super Micro Computer has found itself in the spotlight. The information technology company’s stock has fallen by more than 60% very quickly over the past six months.
9. None of this is a forecast about the future. It is simply an exercise in risk awareness that investors and advisors can benefit from. In an era like now, and back then, it was easy to downplay the risks, since the markets were so resilient.

But history has been a good teacher. And just because risk doesn’t immediately turn into calamity, doesn’t mean it should be ignored.

QQQ Flows: YTD 2024