Lately I’ve seen so many comparisons of the current environment to the late 90’s and other cycles where the market rose in a higher rate environment and even after multiple rate hikes. The implication being that we are in something similar to 1997 or so right now and the market should rise another three years at least because we are just now talking about the Fed raising rates. I believe these comparisons to be ill-informed and I’ll explain why.

The late 90’s was a bona fide bubble. The focus of the market in those days was on this new emerging thing called the internet and all of its potential. Any person that could fog a mirror could take a company public and see its value ascend many multiples overnight. That boat lifted great companies with tons of potential right alongside crap that had no chance of ever making any money, as all bubbles do. Rates were totally in the background. All anyone was focused on was internet, software and hardware companies. So when Greenspan began talking about irrational exuberance and needing to curb it, it was like someone asking you to turn the music down at a party. But the focus is on the music.

In the current market environment there are surely some tiny pockets that look like bubbles- EV’s, crytpocurrencies, the meta verse to an extent. But that’s not the real story. In the current market environment the Fed is the story. Low rates are the story. They are the entire focus of the market. It’s all anyone who follows the market talks about. For the past two years the unfailing bull item has been low rates, low rates, low rates. Free money for all.

It’s curious to me then, that now that the Fed is talking about reducing liquidity and raising rates that people still think that this should have no effect on market psychology. If continued zero rates is bullish, then why is a departure from that not bearish? In other words, if you are bullish on stocks for more than a year with no real change to interest rates or the liquidity story, then why when a change to that story comes, why doesn’t the bull case change?

I believe that because low rates and continued liquidity injections are the reason for the market’s ascent over the past two years that when that story begins to change the character of the market will change. There is no real diversion to make rates a sideshow. We don’t have a new industry enriching millions of people and raising GDP. It’s all based on helicopter money.