Market Bubble 2.0: Are We Repeating 1998?

By Joe Tigay, Former SPX Pit and VIX Pit Options Market Maker, Portfolio Manager of the Rational Equity Armor Fund

Look, I’ve been around these markets long enough to recognize when history starts rhyming. And right now, watching the Fed cut rates last week—just like they did back in September 1998—I’m getting some serious déjà vu. The recent market action is raising a fascinating question that’s keeping me up at night: are we entering a period eerily similar to 1998, where global central banks are inadvertently about to fuel a massive rally?

When currencies around the world start racing to the bottom, investors do what they always do—they panic into hard assets and chase returns wherever they can find them. And folks, it’s starting to look like we might be headed for what the old-timers used to call a “crack-up boom.”

The Race to the Bottom is On

Here’s what I’m seeing that has my trader instincts on high alert. Just like in 1998, when the Asian debt crisis and Russian collapse triggered a global wave of currency devaluations, we’re watching central banks from Europe to India cutting rates left and right.

Now here’s the kicker—and this is crucial—when multiple currencies are all devaluing at the same time, they maintain their relative stability against each other. But investors? They lose confidence in all of them. It’s like watching a synchronized swimming team all sink together.

This global devaluation creates a massive hunt for tangible, high-value investments. Back in ’98, that capital flooded into the U.S. stock market, which happened to be in the early stages of a technological revolution. Sound familiar? Today, we’re seeing the same dynamic with investors piling into hard assets and anything with “AI” in the name.

The Melt-Up Nobody Wants to Talk About

What happened next in 1998 was a textbook market “melt-up”—valuations climbed into stratospheric, extremely overbought territory. I was on the floor watching it happen in real-time, and let me tell you, it was both exhilarating and terrifying.

But here’s what really gets my attention: look at this chart comparing the Nasdaq’s performance after the June 1995 Fed rate cut cycle versus where we are today after September 2024’s cut.

Chart shows Nasdaq performance from June 1995 rate cuts through the end of the decade compared to current market action starting from September 2024 rate cuts. Note the “You Are Here” marker and the potential runway ahead if history rhymes.

The similarities are striking. After that initial 1995 rate cut, the market had a nice run, but it was the emergency rate cut in October 1998—right in the middle of the Asian crisis and Russian ruble collapse—that really lit the fuse for the final parabolic move. When multiple currencies went kaput simultaneously, that capital had to go somewhere. And boy, did it ever flood into U.S. tech stocks.

I think we’re standing at the edge of a similar run today. Stocks could rally significantly, and when I say significantly, I mean the kind of rally that makes people feel like geniuses right up until the moment it doesn’t. If we’re truly following the 1990s playbook, we may have much more upside ahead than most people realize.

The Volatility Warning Signs

But here’s where my experience in the VIX pits really comes into play. While a melt-up sounds fantastic on paper, it carries risks that most investors aren’t prepared for. In 1998, as the market climbed higher, volatility climbed right along with it. The VIX established a higher baseline and then absolutely exploded as we approached the bubble’s peak in 2000.

Today, we’re already seeing volatility driven by current events and tariff headlines. This could be the canary in the coal mine—the first sign that any melt-up ahead is going to come with more turbulence than most investors have the stomach for.

The Self-Fulfilling Prophecy Problem

Here’s the thing about crack-up booms—they become self-fulfilling prophecies. The market turbulence we’re starting to see could eventually cause a cooldown in economic growth, or worse, trigger a debt crisis like we witnessed in 1998 when multiple currencies around the globe imploded. Back then, it started with Thailand, spread to Indonesia, South Korea, Russia, and nearly took down Long-Term Capital Management with it. When everyone’s racing to the bottom simultaneously, someone’s got to hit it first. It’s like watching a slow-motion car crash where the anticipation of the crash becomes the cause of the crash.

The Fed’s Impossible Balancing Act

And then there’s the Fed, stuck between the proverbial rock and hard place. But here’s what’s really concerning—they’ve signaled they’re leaning hard into stabilizing the jobs market, which tells me they’re prioritizing employment over inflation concerns. Their job right now is incredibly difficult—they have to balance two completely conflicting objectives while the labor market shows cracks.

Cut rates too aggressively to prop up jobs? Hello, inflation and asset bubbles. Don’t cut enough to support employment? Hello, recession and potential debt crisis. But when the Fed starts prioritizing jobs over price stability, history shows us that’s usually when things get interesting—and not in a good way. Their ability to walk this tightrope without falling is going to be a key factor in how this whole thing plays out.

What This Means for Your Portfolio

As someone who’s managed money through multiple cycles and built the Rational Equity Armor Fund specifically to navigate these kinds of treacherous waters, I’m watching these developments very closely. The parallels to 1998 are too strong to ignore, but that doesn’t mean the playbook will be identical.

Here’s something critical that most investors miss: look at this chart showing the S&P 500 (in black) versus the VIX (in red) from 1995-1998. While the bubble was inflating, the VIX was also trending higher. This is counterintuitive to most people who think rising markets mean falling volatility.

Chart shows S&P 500 (black line) vs VIX (red line) from 1995-1998. Note how volatility trended higher even as the market bubble inflated.

The lesson here from my years in the VIX pits? The best way to play stocks in an inflating bubble is long stocks, long vol. You want to ride the upside while protecting against the inevitable turbulence that comes with parabolic moves. It’s not enough to just be long equities when volatility is systematically underpriced during bubble formations.

The one thing I learned from my years in the pits is that markets have a way of humbling everyone who thinks they have it all figured out. But they also reward those who pay attention to the patterns and prepare accordingly.

We might be entering bubble territory, but bubbles can inflate for longer than anyone expects. The key is being ready for both the melt-up and what comes after.

This blog post is for informational purposes only and does not constitute investment advice. Past performance does not guarantee future results.