Stocks enter the 'nervous nineties'

Cricket lovers know it as the nervous nineties. It’s the point where a batsman approaches a century, and the stakes suddenly seem a lot higher. Getting from 90 to 100 runs can take an eternity and is often characterised by nervous prods and mis-timed shots.

Well, last Friday stock markets seemed to experience the same late-cycle jitters as the S&P 500 approached the third anniversary of the market low in October 2022. It celebrated a gain of nearly 90% in three years, and promptly had a nasty wobble that saw the US benchmark lose 2.7% of its value in the worst one-day showing since April’s tariff tantrum.

Here we go again

No sooner had US President Donald Trump secured meaningful progress towards peace in Gaza, than he turned his attention back to the on-off trade war with China. Friday’s market stumble followed a Truth Social post in which he lashed out at Beijing’s ban on rare earth exports with the threat of new 100% tariffs.

As is so often the case, he was quick to back track. A conciliatory post over the weekend eased the pressure on the market. After a fall in Asian stocks early on Monday, European markets took a more relaxed approach with shares up in France, Germany and the UK.

More echoes of 1999

The market wobble on Friday was a reminder that share prices can often become volatile in the latter phases of a bull market. The same happened 25 years ago when the final year of the dot.com bubble saw big gyrations in prices. The final rewarding 12 months in the market was not without plenty of nervous moments for investors.

Until Friday, the bull market had been remarkably smooth, with prices boosted by the powerful double whammy of higher earnings and still rising valuations. It’s quite unusual for valuations to keep pushing higher so far into a bull market but it reflects strong growth in earnings, particularly among the big tech stocks that have led the market higher.

That has kept valuations relatively in check. The premium of the biggest stocks over the rest of the market remains at a low level compared to previous moments of sector concentration like the Nifty 50 boom in the early 1970s and again during the dot.com bubble 25 years ago.

Earnings season resumes

This week, attention will re-focus on the earnings side of the equation as the third quarter results round begins. As usual it will be the banks that kick things off with results this week from most of the big players in the US, including Goldman Sachs, JP Morgan, Citigroup and Morgan Stanley.

But, more interesting in terms of where the market heads next could be the numbers delivered by the Magnificent Seven tech stocks and other large companies that have driven the market higher over the past three years.

The current forecast for this quarter’s results is a 7% rise in profits but that seems overly cautious. The usual template is for earnings estimates to increase as results start to come through and another quarter of double-digit gains looks probable.

Gold continues to shine

The stock market may have paused for breath, but the year’s best-performing asset has not lost its lustre. Gold continues to push ahead into record territory, reaching a new high of US$4,060 an ounce this week as investors warm to its safe haven status, central banks use it to diversify their reserves away from the US dollar and fear-of-missing-out kicks in for any investors who have missed out on the precious metal’s 50% rise so far this year.

Another interesting parallel is emerging for gold, as well as shares. This time, the echoes are from the 1970s when gold soared against a backdrop of geo-political uncertainty in Iran and soaring energy costs and inflation. By 1978, gold had, as today, doubled in a couple of years. But, far from peaking, it went on to rise three-fold again.

No-one is suggesting that history will repeat itself, but it does caution against thinking that gold will run out of steam just because it has had a strong run already.

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Please note that the views expressed in this article are my own.