The stock market is looking a lot like it did before the dot-com and ’08 crashes, top economist says

Traders work on the floor of the New York Stock Exchange, October 13, 2008. REUTERS/Shannon Stapleton

  • The stock market resembles the periods leading up to the dot-com and 2008 stock market events.

  • David Rosenberg highlighted the exuberance of AI, which sparked a “raging bull market.”

  • The “speculative madness” that is driving the stock market could soon end, he warned.

The stock market is showing the same warning signs of “speculative madness” that preceded the crashes of 2008 and 2000, according to economist David Rosenberg.

The chairman of Rosenberg Research – who discussed the 2008 recession and was a staunch defender of Wall Street during the latest market rally – pointed to the “raging bull market” that has taken off in stocks, the S&P 500 surpassing the 5,000 mark for the first time. times last week.

The benchmark index has climbed about 22% since its low in October last year, crossing the official threshold for a bull market. The index has also advanced over the past five weeks and has risen for 14 of the past 15 weeks – a winning streak that hasn't been seen since the early 1970s.

But these spectacular gains represent a double-edged sword for investors, as the market looks dangerously similar to the environment before the dot-com bubble and the crash of 2008, Rosenberg wrote in a note Monday.

“With each passing day it feels like a cross between 1999 and 2007. This is a gigantic speculative price bubble on most risky assets, and if AI is real, the Internet “was too, just like the high-flying stocks that populated the Nifty Fifty era,” he said, referring to the group of 50 large-cap stocks that dominated the stock market in the 1960s and 70, before falling by around 60%.

Other Wall Street strategists have warned of parallels between the current market and similar stock booms in the past. Hype around artificial intelligence pushed Magnificent Seven stocks to dominate most of the S&P 500's gains last year, and a major price correction is on its way as valuations reach unsustainable levels, Richard Bernstein Advisors said in an October 2023 note.

“That's the problem when a group of mega-cap 'concept' stocks trade at double the multiple of the rest of the market. The lesson is that (i) the higher they are, the steeper they fall, and (ii) there are dangers when too much growth is priced,” Rosenberg said. “Being real in the sense “economic of the term does not mean that we have not entered a realm of excessive exuberance when it comes to financial markets,” he added, referring to the hype around AI.

The outlook for stocks is also clouded by an uncertain economic backdrop. Geopolitical risks, the risk of recession and the risk that the Fed will disappoint investors hoping for rate cuts are not being priced in by markets at the moment, Rosenberg added.

“I don't find speculative splurges excite me, and in my personal finances I avoid them like the plague. Not everyone likes to hear that, especially since I've missed out on much of it rally, but that’s how I ride,” he said. .

Rosenberg has previously warned investors to exercise caution, given the many risks he sees for markets. Previously, he said the S&P 500 looked “strangely similar” until 2022, when the index plunged by 20%. This is partly explained by a a recession that “few people see and few are ready to face” comes for the economy, he wrote in a LinkedIn post last month.

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