NASDAQ set an 11-year high this week. After peaking at a bubble-popping 5132 in early 2000, the last time the tech-heavy NASDAQ closed over 3000 was on December 11, 2000. We’re now within hailing distance of 3000, but NASDAQ is highly unlikely to reach its old high of 5132 before 2020, if history is any indication. Great historical bubbles usually take 20+ years to recover enough to scale new heights.
There have been three notorious bubbles in the last century. Each took at least 25 years to recover.
- The Dow’s 1929 peak of 381 wasn’t surpassed until November 23, 1954, a quarter-century later.
- Gold’s 1980 peak of $850 wasn’t bested until January 3, 2008, nearly 28 years later.
- Japan’s Nikkei 225 peak of 38957 on the last day of 1989 is still far out of sight. Japan’s main stock index is now around 9300, down more than 75% in the 22 years following its peak day.
NASDAQ’s Y2K “melt-up” may qualify for this super-bubble category. Time will tell. But the Dow and S&P 500 never reached bubble status. They recovered from their 2000 peaks to set new all-time highs on October 11, 2007, at Dow 14280 and S&P 1576. At the time, NASDAQ was only 2800, 45% off its peak.
Silently, stealthily, and with many disappointments along the way, the Dow and S&P 500 have doubled their 2009 lows and are approaching record-high territory. As of yesterday’s close, the S&P only needs to gain 16.5% to set a new high, while the Dow needs only an 11% gain. Can we reach those highs this year – or in 2013? Although there are some well-publicized dangers, the market fundamentals look positive.
The Case for Dow 15000 This Year or Next
Barron’s economist Gene Epstein wrote a cover story in the current edition (“Enter the Bull”), in which he postulates that the Dow should top 15000 within two years “even by conservative measures,” and Dow 17000 is a “50-50 bet.” There are other voices joining the chorus. Laurence Fink, CEO of Blackrock, the world’s largest money manager, said that investors should have 100% of their investments in equities because they offer higher returns than bonds. There’s more: A perma-bull for long-term stock gains, Professor Jeremy Siegel, says that U.S. stocks could rise by as much as 25% if the European debt crisis were resolved. In addition, two long-time bears have started making bullish noises. First, on January 18, David Rosenberg wrote in Toronto’s Globe and Mail that “low P/E ratios offer a ray of hope.” Then, on February 7, the reigning super-bear Nouriel Roubini (“Dr. Doom”) said, “We think this rally has legs!”
Yikes! What’s scary about these predictions is that they are becoming commonplace, sparking fears that a new wave of bullishness can add up to a contrarian signal to sell stocks. But these aren’t wild predictions of 36000 Dow based on New Math. These bullish comments assume moderate (slower) earnings growth.
If earnings grow as expected this year, Epstein writes, “Dow 15000 could be reached with a P/E of 12.8.” And with just 6% earnings growth and a 15.4 P/E ratio, he says the Dow could trade at 17000 next year.
In Barron’s, Epstein cites Professor Siegel’s data, extending back to 1871, which indicates that any bad five-year period – like the 2007-11 period just past – usually results in a strong bull market that pushes indexes to a new high, especially when corporate profits grow as dramatically as they have done recently.
In the latest full five-year period, from the end of 2006 to the end of 2011, the S&P 500 has fallen 11.3%. Despite recent market gains, the last five years (and last 12 years) represent a net loss for U.S. stocks.
The Case for 1600 on the S&P 500 – in 2012 or 2013
People love to watch the Dow for its historical pride of place and its delightfully round numbers, but the S&P 500 is a better and more balanced index for the overall blue-chip roster of U.S. stocks.
Over the last five years, the S&P 500 has bounced between pessimistic readings of 10 P/E and the more rational historic norm of 15. Today’s 12.4 reading is smack in the middle and well below historic norms.
A simple return to normal P/E ratios, along with normal growth, would result in new highs, but investors worry about slowing growth in 2012. With over 71% (357) of the S&P 500 reporting fourth-quarter 2011 earnings so far, the average “surprise” is only 4.9% above the analysts’ forecasts, down from the third quarter’s 6.2%. However, there was a 9.3% surprise for the S&P Industrials, the biggest gain since 2009.
In addition, the supply of stock is shrinking because companies are buying back more shares than they are issuing. Stock buybacks are at a four-year high. Stocks also sport high dividend yields (averaging 2% for the S&P 500), higher than 10-year Treasury bonds, luring badly-scarred income investors back to stocks.
Finally, let us consider the “golden cross,” a positive technical indicator. Whenever the short-term (50-day) moving average exceeds the longer-term (200-day) moving average, the market tends to take off on a strong up-move. In the 15 times this has happened since 1978, the market has gone up in the next 12 months in all 15 cases. The average 12-month historic gain is 14%, which would put the S&P near a new high and the Dow above 15000. The Dow made the “golden cross” at the start of 2012, followed by the S&P 500 and NASDAQ at the end of January. Last week, the Russell 2000 “crossed over” in America, while the Euro Stoxx 50 and UK’s FTSE 100 crossed the golden line in the same week (February 6-10).
Pessimists remind us of deficit spending (politics as usual in Washington), a nuclear Iran, or a Greek exit from the euro-zone. However, these concerns do not directly impact the earnings of most S&P firms. And with an election year, a vigilant Israel, and conservative cost-cutters dominating Europe, we could see some light at the end of these three tunnels this year or next. And that could result in new market highs.
Fasten your seat belts and enjoy the ride.