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“Party like it’s 1999.”

— Prince

Friday throwback charts

Is the party in risk assets just getting started?

The S&P 500 recorded its 39th all-time high for the year this week — which just happens to match the full-year total of new highs recorded in 1996.

That may not be entirely coincidental.

To find a Fed rate cut as market-friendly as the one announced this week, you have to go back to 1995 when Alan Greenspan kicked off an easing cycle while unemployment was low, the economy was growing, equities were making new highs and recession was nowhere in sight.

Sound familiar?

Greenspan’s 1995 decision is memorable because rate-cutting cycles usually begin in response to some disaster, like the great financial crisis or the Covid pandemic.

But this week’s big cut, like Greenspan’s, comes while unemployment is low, the economy is growing, equities are making new highs and recession is nowhere in sight.

This could bode very well for markets because we all know what happened in the few years after 1995.

More importantly, today’s parallels to the late 1990s are not just about interest rates. 

The easing cycle that began in 1995 came amid the beginnings of an IT boom that transformed the world economy: "The innovations in information technology,” Greenspan explained, “have begun to alter the manner in which we do business and create value, often in ways that were not readily foreseeable even five years ago.” 

Now just replace “Greenspan” with “Powell” and “IT” with “AI” and you’ll see why I’m starting to get nostalgic. 

Powell’s cut comes amid the beginnings of an AI boom that looks set to do for the 2020s what the IT boom did for the 1990s, but bigger — no one can foresee what artificial intelligence might mean for the economy over the next five years.

The latest sign that the US economy is on the brink of something special came this morning with news that the long-shuttered nuclear power plant at Three Mile Island will be restarted to meet Microsoft's AI-related power needs.

Does that mean the stock market is on the brink of something special, too?

The prescient economist Ed Yardeni thinks it might be.

In a note yesterday, he said that Powell’s market-friendly rate cut has prompted him to raise the odds of a 1990s-style market “melt up” — he now puts a 30% probability on a melt up taking the S&P 500 above 6,000 by the end of this year.

If so, that would not only elevate the balance of your investment accounts — it would elevate the legacy of Jerome Powell, too.

If Chair Powell presides over a soft landing for the US economy that transitions straight into a booming stock market, he will most likely pass Alan Greenspan to take second place in the consensus rankings of all-time great central bankers (behind only Saint Volcker).

For investors, that really would be a party.

Let’s check the charts.

2.9%:

The Atlanta Fed GDPNow model sees the US economy growing 2.9% in Q3 — a reminder that the Fed is cutting because inflation is down, not because growth is.

Best of the bunch:

The US is cutting rates despite having the best growth among developed nations. This may be the reason the US accounts for 65% of world stock market value despite being just 18% of GDP. 

Real gains for real people:

Real (ie, inflation-adjusted) US GDP per person is at a record high in the US. At $68,000 in 2024, real GDP per person is more than 50% above what it was when Greenspan cut rates in 1995 and more than double what it was when Three Mile Island melted down in 1979.

Defying expectations:

The rate-cutting cycle has started despite unemployment staying lower for longer than nearly anyone expected.

Trend change?

US wages are accelerating — another thing you don’t expect to see when the Fed is in rate-cutting mode.

The hottest job market has gotten cold:

Available software jobs are plummeting, possibly because tech companies are hiring a small number of costly AI engineers instead of high numbers of regular ones. The effect of AI on employment generally appears to be benign, however (so far).

AI’s spreading impact:

US manufacturing is booming, in part thanks to the huge investments going into semiconductors and AI compute.

Falling rates and rising everything else?

Sounds like a party.

Have a great weekend, all-time high makers.

— Byron Gilliam

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