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Although last week’s market correction was long overdue (and perhaps not finished), two differences separate the tech bubble of 1999-2000 and the present. The similarities are there with respect to elevated prices for many tech stocks, however, economists at Morgan Stanley think the fundamental backdrop is very different. 

Key quotes

“2000 was a classic late cycle period: unemployment was very low and the Fed was beginning to tighten policy to stave off excesses in the real economy. Today, we are in a very early cycle, and still in the nascent stages of a recovery from a recession. Unemployment remains elevated and the Fed continues to provide very stimulative policy. In fact, many parts of the economy are still very much in a recession and haven’t even begun to recover yet.”

“The excesses in the equity market appear to be in smaller stocks, rather than the larger stocks that make up the major averages. Nevertheless, until leverage returns to more normal levels, the major averages remain vulnerable.”

“Our advice continues to recommend patience in the near-term, and try to take advantage of this correction by buying stocks with the most upside to an improving economic backdrop, as the vaccines are distributed and things fully reopen. These would include stocks in the pro cyclical sectors like banks, materials, industrials and consumer. Buy such stocks during this much needed correction that likely isn’t finished.”