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Adjust for cyclicality, only time there S&P 500 it was more expensive than it was now in 2000. Just before the dotcom crash saw tech stocks plummet.
Investors cannot ignore this, but the problem is what to do about it. And the answer is not to start selling stocks – or to stop buying.
Stock market crash
It’s almost impossible to ignore the similarities between the stock market in 2000 and today. The rise of artificial intelligence looks like the rise of the internet.
The casualties of the dotcom crash were many. Some stocks are down more than 90% and investors who bought them at the peak are still waiting for them to recover.
Outside of tech, there were stocks that not only held their value, but actually rose as investors sought safety. These were stocks in sectors such as consumer protection and utilities.
One strategy for investors looking for US stocks in the current market is to look outside of AI for potential stability. But I think this is a dangerous approach that needs to be handled carefully.
Self defense
One of the stocks that did well in the crash of 2000 was Procter & Gamble (NYSE:PG). There are obvious reasons why – it has a strong position in a market where demand is stable.
The stock can hold up well if the market sells off again. But the S&P 500 has underperformed since 2000 and investors need to decide if this is a real long-term opportunity.
Income growth over the past decade has been less than 2% per year. And the stock trades at a price-to-earnings ratio (P/E) of 22, which is quite cheap.
That is not a criticism – the growth opportunities have not been there in recent years. But investors need to think of stocks as long-term investments and not just short-term speculation.
Staying the course
When you think about the crash of 2000, it’s easy to forget that the best move for many investors was to stay put. Amazon (NASDAQ:AMZN) is a good example of this.
The company’s stock price fell more than 95% when the dotcom bubble burst. But even investors who bought too high have gained more than 14,000% on their holdings since then.
There is a good reason for this. Amazon has taken a proactive approach to creating shareholder value. Its online platform has created a superior position with a long-term focus.
By focusing so much on customers, it has created a scale that makes it almost impossible for other businesses to compete with them. And more has followed since then.
What I do
I hold Amazon stock and the company is good at using AI. And there is a real risk that this may not pay off if demand does not materialize as expected.
In that case, the share price may drop. But I’m a buyer, rather than a seller, at today’s levels — even with the S&P 500 at historic highs.
To my mind, the history lesson is pretty clear. Investors who can identify businesses with long-term competitive advantages need not worry about stock market crashes.
