In 2020, Equities Are Partying Like It's 1999

Did we just finish the 2010s?  Or was it the 1990s all over again?  Superficially, the two decades exhibited many similarities.  Unemployment fell.  Inflation remained stable.  Stocks soared.  By the end of both decades equity market capitalizations were over 130% of GDP (Figure 1).  Both decades also experienced weak commodity prices and emerging market stress.

Figure 1: Back to Y2K valuation extremes but interest rates are 1/3 their 2000 levels.

Moreover, the same sectors that drove the 1990s rally were behind the 2010s rally.  During the 1990s, tech stocks led the market, followed by health care and consumer discretionary shares (Figure 2).  The same three sectors led the market higher in the 2010s (Figure 3).  During the 1990s, the weakest sectors were energy, materials and utilitiesThose three sectors made up three of the four weakest sectors during the 2010s, along with telecom stocks, which turned in an average performance during the 1990s but lagged during the 2010s. 

Figure 2: IT, health care and consumer discretionary sectors dominated returns in the 1990s.

Figure 3: IT, health care and consumer discretionary sectors dominated returns again in the 2010s.

The correlation of sector performance between the 2010s and the 1990s is 0.68 (Figure 4).

Figure 4: The winners in the 1990s won again in the 2010s.

Heading into the 2020s, market conditions could hardly look more different than they did in 1990 or in 2010.  At the beginning of the 1990s, the US economy was heading into a recession, plagued by a crisis of small banks (saving and loans) and bad real estate loans.  The Federal Reserve (Fed) was slashing rates, from 9.75% to 3%.  At the beginning of the 2010s, the US unemployment rate was nearly 10%.  The banking system was just beginning to recover from its most severe crisis since the 1930s.  Housing prices had collapsed nationwide.  The Fed was experimenting with zero rates and quantitative easing.

Superficially, the beginning of the 2020s looks a great deal more like the state of the world in 2000 than in 1990 or 2010.  Unemployment is below 4%.  There are no obvious problems with the banking system.  Real estate prices are on a modest upward trend but don’t appear to be in bubble territory (at least not in most of the US).  Energy and materials prices are far from historical highs.

There are important differences as well.  On the positive side for equities, as the 2020s begin, interest rates are only one-third of their 2000 level.  Presumably markets can sustain much higher levels of valuation at lower levels of interest rates than they could at higher levels of interest rates.  Perhaps having the S&P 500® valued at 130% of GDP isn’t a problem today with long-term rates just above 2%, while it was, in retrospect, a problem in 2000 when long-term rates were around 6-7%.

On the negative side for stocks, the US fiscal situation is vastly different today than it was in 2000, when the US government ran a surplus of 2% of GDP and government debt totalled just 51% of GDP.  Today, the US government is running a deficit of nearly 5% of GDP and public debt is close to 100% of GDP.  If the economy runs into trouble in the 2020s, it will be harder to use fiscal and monetary policy to save the day than it was in 2001 or 2008 when debt levels were much lower and interest rates were much higher. 

When it comes to equity sectors, a new decade is not always kind to the previous decade’s winners.  After winning in the 1990s tech stocks were among the worst performers in the 2000s.  Consumer discretionary stocks also performed poorly.  By contrast, energy, materials and utility stocks, which lagged during the 1990s, outperformed during the next decade (Figure 5). 

Figure 5: Commodity-related and defensive stocks outperformed from 2000 to 2009.

The correlation between sector performance in the 1990s and performance in the 2000s was -0.56 (Figure 6).  It was also quite negative for the 2000s versus the 2010s: -0.40 (Figure 7).  The best performers during the period from 2000 to 2009, energy, consumer staples, materials and utilities, turned out to be among the lowest performers this past decade.

Figure 6: The winners of the 1990s were among the biggest losers of the 2000s.

Figure 7: The 2000s outperformers tended to underperform this past decade.

The state of the economy and commodity markets explains much of these gaps in performance.  When the economy grows strongly, tech stocks and consumer discretionary are likely to be among the winners while defensive stocks such as utilities and consumer staples are likely to underperform.  Energy and materials stocks tend to out/underperform depending on whether energy and metals prices are rising or falling.  If the 2020s turn out to be a decade of robust global growth perhaps consumer discretionary and tech stocks can lead the pack for a second decade in a row at the expense of utilities and consumer staples.  If China continues to grow strongly this decade, it could benefit commodity-related shares.  On the other hand, should the 2020s turn out to be a troubled decade like the 2000s, the most defensive sectors may turn out to be the winners. 

Bottom Line

  • The sectors that were winners in the 1990s also won in the 2010s.
  • The strongest sectors in the 1990s underperformed between 2000 and 2009.
  • Equities are back to Y2K valuation extremes.
  • But rates are only 1/3 their levels from 2000.
  • If 2020s are robust economically, tech and consumer discretionary shares could outperform.
  • If 2020s are troubled like the 2000s, defensive stocks might be the winners.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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