Is It Déjà Vu All Over Again?

Kristian Kerr | Head of Macro Strategy

I like to study the past. While having a good understanding of market history isn’t the be-all and end-all for investment analysis, it can often offer valuable insights by giving a window into the thinking that others before us had when facing similar circumstances and situations. After all, we are all only humans, and that is why patterns and episodes in the market tend to repeat in some form or another. Things like market structure and trading technology will always be evolving, but human behavior remains largely constant. 

Over the last year or so stock market index returns have been heavily influenced by just a handful of stocks. This intense bifurcation of the stock market is unusual, but not at all unprecedented. Many have likened the current environment to the late 1990s and there are certainly many similarities. Another potentially analogous period is the early 1970s and the rise of the so-called “Nifty Fifty” stocks. In response to the relatively brief yet painful bear market of 1968–1970, investors flocked into a group of around 50–75 high-quality growth stocks with exciting prospects that had held up well during the downturn. Initially, the move into the Nifty Fifty was driven by a search for safety and a desire to avoid speculation after a period of market pain. However, as is often the case when momentum takes over, the narrative morphed alongside the rapid rise in price. Prior to the peak of the Nifty Fifty phenomenon in early 1973, after a significant increase in share prices (many Nifty Fifty stocks doubled and some even tripled from their 1970 lows), and with roughly 30% earnings growth for the group in 1972, many investors had come to believe that these companies were impervious to the economic cycle, that their growth trajectories could continue indefinitely and that valuations were largely irrelevant.   

The irony, looking back, is that many of these companies are still around today, and a significant portion achieved impressive earnings growth over the following decades. However, this didn’t prevent their stocks prices from experiencing significant drawdowns (most over 40%) from 1973 to 1974 and underperforming the S&P 500 for the rest of the 1970s.  Just because a company is good doesn’t mean it is a good investment at that particular point in time. Price and valuation do matter over time. When everyone piles into the same stocks, they are often just chasing a theme, and themes can change quickly.

Will the current infatuation with just a handful of good companies eventually follow a similar path as the Nifty Fifty? And if so, are we currently only at the equivalent of 1971, or are we already in late 1972? Only time will tell, but this episode from the early 1970s serves as a reminder that myopically chasing growth stocks with exciting themes is probably not some magic formula for achieving above-average returns into perpetuity as much as the current market zeitgeist may try to convince us otherwise.


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