in which Downtown Josh Brown destroys the 1999 comparison
- Joshua M Brown
- May 16th, 2013
I’ll be brief here because I don’t have a lot of time for nonsense. I have a few major projects in the works and actual portfolios to manage for people, not theoretical or virtual ones.
Okay – so the 1999 comparisons have begun to surface. They’re saying that the market feels or looks like 1999, mainly because stocks are up in an uninterrupted spree and people are starting to feel good about their investments. Today I even participated in a television segment about this premise. I’m not going to post the overlay charts where I show you 1999 vs 2013 because I already said I was done publishing that kind of pornography (see: Lying With Charts).
The bottom line is, it’s stupid. Anyone can find similarities in the stock market action of different years. It’s not complicated – stocks can really only do some combination of three things, up, down or sideways. But this type of comparative analysis is, as always, a function of what details you choose to leave out. I can compare my house to the Taj Mahal if I choose to leave out quantitative factors like square footage or qualitative factors like its location or historical significance.
I want to remind you about some peculiarities from 1999 that you may have forgotten – some major market differences between then and now that I believe demolish the comparison.
Imma strangle this thing in the crib before it screws your head up:
First, let’s get valuation out of the way…
Here’s a very rudimentary but essential thing to be aware of – in 1999 the S&P finished at 1469, earned 53 bucks per share, and paid out $16 in dividends. These are nominal figures, not adjusted for inflation.
The 2013 S&P 500 is earning double that amount – over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.
This sounds pretty good, what’s the catch?
What kind of premium, pray tell, are we paying for double the earnings and twice the dividend yield versus 1999′s market? I’m so glad you asked – turns out we’re not paying any premium at all. We’re paying a discount. 50% off. The current S&P 500 trades for a PE of 14 versus 33 for 1999. So double the fundamentals for half the price.
Sound frothy to you?
But what about the Shiller CAPE?
There are other ways to measure the valuation of the total stock market, from the Fed Model to the Q Ratio to the Total Market Cap as a percentage of Gross National Product GNP (Buffett’s preferred method). We’re moderately under- to moderately overvalued based on these different methodologies. The metric the bears favor (and have been misled by for years now) is the Shiller CAPE 10, a cyclically adjusted PE ratio that takes the trailing ten years worth of data in the hopes of smoothing out the expansions and recessions over the course of the cycle. By this measure, we are on the high side historically at 24 times earnings – but this is an obscenely flawed way of looking at the market now and it has cost the eggheads a fortune.
This tool hasn’t worked now because it includes not just ordinary recessions in its tabulation of the last ten years’ worth of earnings, it includes the once-in-a-lifetime epic catastrophe of 2008-2009 which skews the ratio much higher than it would ordinarily be. From the 2006 peak through the trough year of 2009, S&P 500 earnings dropped more than 30% with many of the major components posting full year losses on a GAAP basis. This was an unheard of occurrence that has almost never happened – certainly not during a garden variety recession. As a result of this disastrous economic event, the PE ratio for 2009 shot up to an abnormal level of 70 times trailing 12 months earnings. By 2010, this had normalized but when Shiller CAPE 10 is calculated, there is no asterisk – it encompasses this event as though it’s par for the course!
Those running money based on this single datapoint (hopefully not many) have crushed their clients and have kept them out of one of the best bull markets of all time (plus 145% over five years). Even if the market stages a sharp 20% correction (we have one of those every 3.5 years, on average) they will still have been wrong. Oh, and by the way, while the Shiller CAPE 10 now is 24, in 1999 it was almost double that at 45, and certainly not because of any Credit Crisis-esque event
But isn’t speculation rampant?
They say the opposite of love is not hate – it is indifference.
Americans are indifferent to stocks and have been completely apathetic to every milestone we surpass if mainstream media coverage (or lack thereof) is to be our gauge. I read the articles in every newspaper in the United States this winter as we made record highs in the Dow Jones Industrial Average (the people’s index) and could barely find a mention of it that wasn’t laden with skepticism (see: Meanwhile on Main Street…)
Speculation is always rampant somewhere – the art market, real estate, commodities, stocks, Texas Hold’em, the NCAA Tournament, the Triple Crown, jai a’lai, whatever. This is a feature of human nature, not a bug. But what you need to remember about 1999 was that stock market speculation had truly become America’s pastime. Everyone was trading, everyone. It was all people wanted to talk about, at the barber shop, at the mall, at cocktail parties, at the water cooler, at the dinner table. Jackie Chan, Shaquille O’Neal, Anna Kournikova and Phil Jackson were starring in online brokerage commercials that were running literally around the clock on every channel, talking about investing as though it were a game. People couldn’t wait to login to see their accounts and often barely went a week without trading a new stock. We were dumping money into mutual funds with a backhoe.
In 1999, the S&P 500 rose by 19.5% – a good gain but you should know that the gains were extremely concentrated, more than half of the companies in the S&P were actually negative on the year! The Nasdaq 100 was up an astounding 85% in 1999, a mania for the ages, but an extremely sector-specific one. This contrasts with today, where almost every sector is now participating in the advance in a rolling, rotating, sexually undulating manner not unlike the midriff of a belly dancer.
In 1999, the market was led by Qualcomm, which went up 2,619 percent during the course of the year. There were twelve other Nasdaq tech stocks that gained more than 1,000 percent that year and seven more that were up over 900%. These companies were hardly earning any money and many of them had been founded just hours before coming public. There was more than $50 billion in IPO issuance that year, with profit-challenged tech stocks representing about half of that, more than 200 of them went public in 12 months and on average they debuted with an 80% gain.
You people were smoking fucking PCP.
In 2013, the stocks leading the markets are blue chip companies with obscenely high profits and more cash being generated than they know what to do with – they’re keeping it in garbage bags and dumping back on their shareholders like an avalanche. Health care stocks are working, as are energy stocks and retailers and techs and banks and REITs and utilities and homebuilders and industrials and autos and airlines and whatever else you can think of with only a handful of exceptions, mostly in the materials space (less than 6% of the S&P).
Today the stock market is almost wholly owned by institutions and the top 20% of US households by net worth, no one else is there. The marginal speculators are doing futures, currencies or some other sort of crack cocaine, and it’s almost impossible to find a regular person who has any interest in talking about the stocks they own. Bank of America Merrill Lynch calculates that retail investors have ripped out a net $1 trillion in assets from stock mutual funds over the last seven years while adding a trillion to bond funds. CNBC’s ratings are at an eight-year low and it’s not because they’re doing anything different than they used to, it’s just that people don’t care.
Stock market-focused websites are having trouble finding a reason to continue existing given the dwindling population of hobbyist investors. There is a finite pool of people who want alerts and stock picks (TheStreet.com estimates it is 3 million and I would take the under). It is an old audience with nostalgia for the 1982-2000 bull market and it is dying slowly but incessantly. This audience is not being replenished with new enthusiasts – Gen Xers are disillusioned, Gen Yers are bored with it and the Millennials are scared to death and think stocks are the devil.
Apart from a handful of solar stocks and an electric car company, I can find no evidence of a speculative mania in the stock market, despite what those who have missed out want to believe. If anything, there’s been a dis-speculative frenzy into “safe assets” like bonds, cash and gold. Sentiment, and more importantly fund flows, have only just begun to turn. If you use the term rotation to even insinuate that people are selling bonds to buy stocks, tomatoes are promptly hurled your way as the consensus cannot even grasp this being possible.
There is no mania.
Stocks are much cheaper than they were in 1999, their holders more fearful and chaste.
Stocks are not even close to being hyped up or over-loved by mom & pop.
This rally is broadly led and spread out, not driven by 900% gainers in one sector of the economy.
This is nothing like 1999 other than the fact that stocks are going up. This doesn’t mean that they can’t go down, it simply means that being in the market now isn’t crazy or stupid or reckless. Being out of market, on the other hand, with a retirement somewhere far out on the horizon, is the height of recklessness, the opposite of conservative.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.