Is the Stock Market Headed for a 1990s-Style Meltup? Yardeni Research Raises Concerns

The recent decision by the Federal Open Market Committee (FOMC) to cut interest rates by 50 basis points has sparked a debate about its potential economic implications. Yardeni Research has drawn parallels between the current economic environment and the conditions that led to a stock market “meltup” in the 1990s.

A meltup is characterized by a sharp and unsustainable rise in asset prices driven more by investor sentiment than by improving fundamentals. Yardeni’s comparison to the 1990s is significant, as that period saw low inflation, robust economic growth, and a surge in asset prices, particularly in the tech sector.

The combination of aggressive monetary easing, low interest rates, and technological advancements fueled a prolonged bull market in the 1990s. However, this surge in stock prices eventually led to a bubble that burst in the early 2000s.

Yardeni suggests that the recent rate cuts, despite the already strong economy, could set the stage for a similar trajectory. The stock market has shown signs of frothy valuations, and further easing could accelerate these trends.

By removing recessionary risks, the Fed’s policy encourages more liquidity in the market, potentially fueling a stock market rally driven by investor exuberance rather than solid economic fundamentals. Yardeni warns that the FOMC’s move could stimulate an economy that does not need further boosting, pushing asset prices into overvaluation territory.

The analysts at Yardeni raised their subjective probability for a 1990s-style stock market meltup from 20% to 30% last week. They imply that a surge in liquidity could lead to excessive speculation, particularly in technology and growth stocks where valuations are already stretched.

While FOMC Chair Jerome Powell’s decision to lower rates aims to prevent a significant rise in unemployment, Yardeni suggests that prioritizing avoiding recession risks may increase the chances of overheating. This approach could mirror the Fed’s strategy in the 1990s, which focused on short-term economic gains at the expense of long-term stability.

Yardeni remains cautiously optimistic about the long-term prospects for productivity growth, envisioning a “Roaring 2020s” scenario driven by technological advancements. However, they warn that even in this optimistic scenario, a stock market meltup could lead to a subsequent correction or crash.

Analysts caution about the potential for higher long-term inflation and volatility as the market adjusts to easier monetary policy. While the outlook for productivity growth is positive, the risk of a stock market meltup looms large.

In conclusion, the recent rate cuts by the FOMC have increased the odds of a 1990s-style stock market meltup, according to Yardeni Research. Investors should remain vigilant and consider the potential risks of excessive speculation and overvaluation in the current market environment.