It’s the interest rates, stupid. Rate hikes are how you’ll know when the stock rally is over, according to billionaire investor Mark Cuban, who made his fortune in the dot-com era before that bubble burst.
If rates stay low, which all signs indicate that they will, the market should be fine, the “Shark Tank” TV star told CNBC. That view is opposed to the gloomy note struck by hedge fund hotshot Paul Tudor Jones, who earlier this week warned that these days remind him of 1999, which ended with the dot-com implosion of early 2000.
With rates staying so low, Cuban said, “Where else are you going to put your money?” That feeds into the popular bullish catch phrase about the market: TINA, which stands for There Is No Alternative. “So that money is going to continue to flow into our equities, our market,” the entrepreneur reasoned.
At some point, the Federal Reserve will want to raise rates again. It set out on that task from late 2015 until last year, when it succumbed to pressure—the central bank denies that—and quickly lopped the benchmark rate by 0.75 percentage point.
There’s an argument that the Fed helped pop the internet bubble two decades ago. The federal funds rate now is in a range from 1.5% to 1.75%. The rate was in mid-single digits in the late 1990s, but the Fed was raising it. Often, the direction of rates is what matters vis-a-vis market psychology.
Until mid-1999, the rate was 4.74%. Then the Fed jacked it up to 6.0% by spring 2000, when the dot-com era came crashing down. And today? “I think interest rates will tell us what’s going to happen next in the market. Is it frothy? You can definitely make that argument,” Cuban said. “Is it like 1999? No.”
The Fed shows no inclination of pushing rates back up, saying that it only will take that step if inflation starts to build, which is unlikely in the near term.
Result: The market has enjoyed a buoyant 2019, with the S&P 500 up 29%, its strongest annual performance since 2013. Thus far in 2020, the index is ahead 2.9% as of Thursdays close.
As Cuban, owner of the Dallas Mavericks basketball team, can tell you, timing is everything. He sold Broadcast.com to Yahoo in April 1999, before the tech sector went wrong, bagging him $5.7 billion.
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Tags: dot-com bubble, Federal Reserve, Interest Rates, Mark Cuban, Paul Tudor Jones, Stock Market