Will we see a repeat of the 1990s?

On Friday, Roben Farzad at Businessweek asked: Is the Stock Market About to Go Totally ’90s?

[S]ome on Wall Street are wondering if we’re about to replay some version of that ’90s mix tape. Liz Ann Sonders of Schwab (SCHW) and Ed Yardeni of Yardeni Research have been discussing this theme of late with clients.

“The global economic scene is increasingly reminiscent of the 1990s, when the U.S. economy and stocks outperformed relative to the rest of the world,” wrote Yardeni last week. “Back then, emerging markets submerged when the Asian Tigers were hit by a currency crisis in 1997 and Russia defaulted on its debt in 1998.”

“Today,” he adds, “the high-tech revolution that started in the 1990s is spreading to lots of other industries that are using technology to innovate and to boost productivity. Once again, the U.S. seems to be leading the way. Emerging markets are submerging again. Europe’s recovery is lackluster. … Commodity prices are flat-lining.”

In her March 17 note—“Objects in the Rear View Mirror May Appear Closer Than They Are: A Look Back at the 1990s”—Sonders tallies the many similarities between then and now, including extremely easy monetary policy transitioning to some semblance of normalcy; persistently low inflation; a major developing-market deleveraging (Japan then vs. the euro zone today); rising interest in stocks and partisan gridlock in Washington.

However, Farzad also notes some differences between conditions then and now.

There are, of course, major differences between today’s backdrop and that of the early-to-mid 1990s. Never has the Fed thrown so much stimulus at an economic slowdown, the 2008-09 likes of which was more painful than anything seen since the 1930s. Today’s profit margins are unusually fat. Income inequality is worse. The giddy 1990s, moreover, set us up for the triple trauma of the following decade: the tech crash, Sept. 11, and then the housing collapse and Wall Street’s near-death experience. So, says Sonders, it stands to reason that a thrice-bitten skepticism stands in the way of a full 1990s redux.

I would add that the 1990s was a period of growing global labour surplus, which helped boost corporate profit margins as well as kept inflation low, allowing central banks to maintain monetary conditions that were favourable for financial markets.

That period looks over. Gad Levanon, the director of macroeconomic research at the Conference Board, foresees 15 years of labour shortages in the US, while China's labour force, the world's largest, is expected to grow at 0.7 per cent a year until 2015 and then shrink thereafter.