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There are two financial-market clichés that you might have heard, one of which is largely accurate and another of which is almost always false. The first one is “History doesn’t repeat itself, but it often rhymes,” while the other one is “This time it’s different.”

When the prevailing stock-market sentiment is one of euphoria, it’s tempting to believe that it’s different this time around. The idea of market structures collapsing under their own bloated valuations seems impossible and the bull market looks invincible to the casual observer who hasn’t studied history.

This brings me to another cliché: “The bigger they are, the harder they fall.” In 1999, high-flying tech stocks pulled the S&P 500 to dizzying heights; the Internet was fairly new to most households at that time and start-ups like Pets.com were flooded with investment capital from bandwagon jumpers hoping to capitalize on the trend.

And they did capitalize – for a while, at least. When the dot-com bubble burst in 2000, the S&P 500 was cut in half and tech-sector stocks crashed 80%. Again, the bigger ones fell the hardest as the snapback effect was powerful and devastating to investors who bought on hype and “momentum” without paying attention to P/E ratios and other valuation metrics.

So here’s a fun trivia question for you: can you guess which two stocks’ market capitalizations made up nearly 10% of the S&P 500’s market cap in 1999? You probably got one right and one wrong since Microsoft is an obvious choice for the Internet Age but the other company isn’t:

Courtesy: Cornerstone Macro, FactSet, Carter Braxton Worth

Interestingly, the other company was General Electric. It’s hard to imagine GE being so dominant, as the share price tumbled precipitously and has never recovered; back then it was above $55, while today GE stock struggles at the $13 level.

For MSFT and GE stocks to comprise nearly 10% of the S&P 500’s market cap – that’s two stocks out of 500 – was unsustainable, as we now know in hindsight. Mathematically, two stocks should account for 0.4% of the S&P 500, or perhaps more if they’re huge companies, but not 10%.

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Is 1999-2000 repeating itself in 2019-2020? At the very least, we can say that it’s rhyming, as you can see in the chart above. The S&P’s incredible 29% return last year was driven by tech stocks once again, with the so-called “FAANG” stocks (Facebook, Apple, Amazon, Netflix, and Google/Alphabet) propping up an index that’s supposed to represent 500 companies.

And now we have two stocks holding up one-tenth of the market once again: Microsoft is a culprit just like it was 20 years ago, but now its rival Apple is the co-conspirator. Isn’t it funny how things change and yet they remain the same?

Actually it’s not so funny as the ending to the story of 1999-2000 was quite sobering. Retirement accounts were decimated and non-tech large-cap stocks were collateral damage because the run for the exits was swift and relentless, cutting across all sectors.

Courtesy: Brad Zigler

Along with “Applesoft” propping up the entire large-cap equities market through little more than sheer momentum, another indicator is flashing a warning signal: on January 30, the equal-weighted S&P 500 (represented by RSP in the chart above) fell below the market-cap-weighted S&P 500 (represented by SPY) for the first time in more than 2,700 trading days.

This correlates with the “Applesoft” issue because it’s all about unequal representation and participation in the S&P. When the equal-weighted S&P is leading, that tends to suggest broad participation in the bull-market rally; when it’s lagging (which it’s now doing), the concern is that too few stocks are pushing the index higher.

The inception date of the RSP ETF only goes back to 2003, so we can’t track its behavior relative to the S&P 500 in 1999. However, in the chart above we can discern that RSP did indeed lag the S&P 500 in the months preceding the stock-market implosion of 2008.

To me, though, the current large-cap landscape rhymes more with 1999 than it does with 2008. Unfortunately, less experienced investors don’t know what the prevailing market sentiment felt like in 1999 – though more experienced participants do recall the feeling, and the sense of déjà vu is overwhelming.

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