Stocks Are Rising and Inflation is Coming Down in This 'Roaring 2020s' Market

In the early 2020s, comparisons were often drawn between the current decade and historical periods such as the 1920s and the 1970s. However, the recent 42.3% surge in the S&P 500 since October 12, 2022, leading to a new record high, has prompted considerations of parallels with another era – the second half of the 1990s. This article explores the similarities between the late 1990s and the present, suggesting potential outcomes for the stock market and the federal funds rate (FFR).

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The surge in the S&P 500 has been notably driven by the Nasdaq 100, mirroring a pattern observed in the late 1990s when the ratio of Nasdaq 100 to S&P 500 reached its bottom on January 5, 2023. A particular focus is placed on the resemblance between the recent rapid ascent of Nvidia's stock price and the similar trend observed in Cisco Systems' stock price during the late 1990s.

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Drawing comparisons between the two periods, the article suggests that the script of the late 1990s may be the most plausible scenario for the federal funds rate in the remainder of this decade. During the 1990s, soaring stock prices contributed to positive economic growth, while inflation remained subdued due to rapid productivity growth. The inflation-adjusted FFR was in line with the so-called "neutral" FFR.

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Several factors are considered to support this comparison:

1. Real GDP: The 1990s began with a brief recession, followed by a rebound in real GDP growth to its historical average of 3.1%. The current decade, starting with the impact of the COVID-19 pandemic, has witnessed a strong recovery, with real GDP reaching the historical average growth rate of 3.1% by the fourth quarter of 2023.
2. Productivity: Both decades experienced fluctuations in productivity growth, with the second half of each decade marked by a productivity growth boom. The article anticipates a similar productivity growth trend during the second half of the current decade.
3. Inflation: The 1990s saw a decline in unit labor costs (ULC) and CPI inflation rates due to productivity growth. The article suggests that in the "Roaring 2020s" scenario, CPI inflation will continue to moderate along with ULC inflation as productivity growth improves.
4. Unemployment: Comparing unemployment rates, the article notes that the labor market is already tighter in the current decade than it was in the late 1990s. Tight labor conditions may lead businesses to invest in productivity-enhancing technologies.
5. Federal funds rate: The federal funds rate in the late 1990s ranged between 5.0% and 6.0%, reflecting a well-performing economy. The article speculates that a similar scenario might unfold in the remainder of the 2020s, with the FFR staying higher for a more extended period.
6. Bond yields: Examining real bond yields, the article notes that even with an increase, the real bond yield in the current decade may remain below the levels observed in the 1990s.
7. Stock market: The positive wealth effect of the stock market is highlighted as a factor contributing to economic resilience. The value of all stocks traded in the U.S. has increased significantly, akin to the 1990s.
8. Bottom line: Drawing parallels between the Roaring 2020s and the Roaring 1990s, the article suggests that the stock market's positive wealth effect may lead to a resilient economy, and the Federal Reserve might be hesitant to lower the federal funds rate for an extended period.

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The article concludes by emphasizing the need to monitor meltup indicators, including S&P 500 long-term earnings growth, and acknowledges that the Roaring 2020s share similarities with the late 1990s, with both decades ending in stock market melt-ups followed by meltdowns.

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