Can the Stock Market Crash Like it Did in 2000?

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"Say say two thousand zero zero party over, oops, out of time So tonight I'm gonna party like it's nineteen ninety-nine" - Prince 1999

Prince wrote the song “1999” in 1982, 18 years before the clock ran out on the 20th century and the greatest stock market run in American history.

In 1999, equity valuations stood at unprecedented peaks, even dwarfing those of 1929. Investors were euphoric as if the rally were eternal. Newbies were killing it, and veterans were cleaning up like never before. Some stocks were rising 10, 20, and even 30% or more in a day. Companies adding “dot com” to their name or touting internet technology saw huge pops in their share prices. Investors bought the narrative with little to no due diligence.

Sound familiar? Not only is today's speculative environment eerily similar to the late 90s, but valuations, in many cases, are frothier than that period.

Comparing valuations from separate periods is inaccurate, as economic and earnings environments can be different. This article contrasts the valuations and environments to ask if it's time to leave the party or stay and rock on. To help you decide, I provide a statistical analysis showing the downside risk facing the S&P 500.

First, however, let's look at a few valuation measures to provide context between today and 1999.