32.9 Percent...That was the contraction of the United States economy during the second quarter of 2020. That announcement combined with an unemployment rate of 11.1%, and the highest bankruptcy rate since the financial crisis, have caused the stock market to crash…or not. In fact, over the last 4 months, the stock market has actually had one of its best 4 month periods in history. You heard that right, during the worst economic crisis of our lifetime, the stock market has seen some of the most rapid gains in history.



Many people have attributed this strange behavior to special circumstances and a new kind of market and economy. Yet some people are saying something different.

In fact, there’s a small percentage of investors that have seen this strange pattern...a few times...before



For example, in the year 1993 a new technology called ‘web browsers’ started gaining popularity around the world. These web browsers, or more specifically the Mosaic web browser, allowed for the average computer user to connect to the internet in a simple and straightforward manor for the first time in human history.

And it was this technology that helped lead to the expansion of the internet and computers into the homes of the average person.

In fact from 1990 to 1997, the computer ownership rate more than doubled, from 15% to 35%, and from 1995 to 1999, the number of internet users grew from just 15 million to over 260 million.

Essentially investors could feel the wave of a new economy coming forward. I mean with upstart companies like Amazon selling books over the internet, and Ebay selling almost anything else, investors became extremely excited at the prospects of a new type of economy.

But also during this time, we saw one of the biggest cuts to interest rates in history. From 1989 to 1993, interest rates fell from 9.8 % to just 2.9%. All this meant was that investors could access capital much easier than they could’ve just 4 years prior.

And the last cherry on top was that there was a significant tax reform in the year 1997, which cut taxes on capital gains.

And it was these 3 factors that lead to one of the craziest periods that the stock market had ever seen.

You see, if you invest in the stock market, you can typically expect a 5 to 10% return per year.
But if you were an average investor and started investing in the stock market in october of 1990. You would have seen on average... a return of about 39% per year for the next 10 years.
But...if you were to have invested heavily in the tech sector with an index like the Nasdaq, you would have on average seen returns of 111.8% per year from 1990, up until the year 2000.

Meaning that if you were to have invested $100,000 into the tech sector in 1990, and simply held your investments for a decade, your portfolio would have been worth 1.1 Million dollars.

But the thing is that, this appreciation in the tech sector, and the stock market as a whole, wasn’t really because their was an influx of new companies that were raking in billions of dollars in profits. IT was mainly because there was an influx of investment capital from the excitement of a new economy, low interest rates, and tax cuts.

And one of the key metrics used to tell you how overvalued the stock market is, the P/E ratio. Essentially all this does is compare the price of a stock, to its earnings per share. Even though the value of a company is a lot more complex than a simple P/E ratio, this metric still is a good general indicator for determining if a stock is overvalued.

So in 1990, the average p/e ratio of the s and p 500 index was about 15, which has been close to the average p/e ratio for the past several decades.

But after the influx of new capital started flooding the stock market in the 1990’s, the average p/e ratio on the s and p 500 jumped up to just over 30.

All this meant was that the average company had doubled its value in relation to it earnings, from 1990 to the year 2000.

And during this time, it was common to hear stories through family and friends, and through the news, of people getting very interested in investing and even day trading to try and take advantage of these insane gains.

End of transcript. Too long

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