As I noted in last night’s Whisper recap video, volume was low and action was muted this Monday as stocks barely budged ahead of Turkey Day. The move lower after pending home sales disappointed big time was expected – with a 0.6% drop versus expectations for a 2.2% increase (last month pending home sales dropped almost 5%!)
The S&P 500 was off just 2.28 points, or about 0.1%, to end at 1,802.48, pulling back from Friday’s record close but staying above that psychological level of 1,800.
The Dow Jones added 7.77 points, also about 0.1%, to finish at 16,072.54, scoring another record close above the 16,000 mark; its 42nd record high for the year (if you’re keeping score).
The NASDAQ briefly got above its 13 year high of 4,000, but it couldn’t finish above that milestone level that it last closed above since September 2000. The still relatively cheap index ended up 2.92 points, or about 0.1%, at 3,994.57.
I say cheap, because tech companies as a whole (e.g. Nasdaq 100) are trading at much lower multiples then they have on average since 1990. Obviously there’s more to the story here – stay tuned later this week for our tech deep dive.
In a webcast on Friday, Wharton professor Jeremy Siegel brought up some interesting and viable points with regard to market valuation (I seldom listen to professors regarding stock valuations, but I happen to agree, at least partially, with his logic).
Siegel explained that in lower interest rates environments (lower than 8%), U.S. equities, as measured by the S&P 500, have averaged a price-to-earnings ratio of 19.
A 19 P/E ratio for the index would imply a fair-market value for the S&P 500 of over 2,000 based on this year’s combined earnings, which is 10% to 13% higher than the index’s current levels.
The problem is his analysis is that he didn’t hypothesize what would happen to discounted cash flow projections (what analysts use to predict stock values) if interest rates went from near 0 to 3 or 4% and mortgage rates doubled. But let’s stick to the “fun with statistics” for now..
Siegel went on to note that the technology sector, currently trading at a P/E of 13, is at “one of the cheapest [levels] it’s ever been relative to the rest of the market,” adding that tech stocks have historically traded at a premium. “We’re used to seeing it at 25.”
Sure “tech” valuations are cheap when you average or total everything out, but is it really “old school tech” that we are still talking about? Nope!
The Pandoras, Facebooks, Twitters and LinkedIns of the world are trading at astronomical valuations with unproven and spotty earnings history.
What’s even more bonkers is that startup, no profit, tiny companies (let’s just call them programs or apps) like Snapchat that do the same thing as a handful of other apps are being valued at over $3 billion dollars; which is more than the annual GDP of the country of Nicaragua. Snapchat lets to take a picture and send it instantly and then that picture expires after a certain amount of time (That not-so-original app is worth over $3 billion?).
I would say that there are still bubbles out there and not everything, not even the majority is “valued fairly.” It’s a fair statement to say that stocks ON AVERAGE are still somewhat attractive overall given the present economic and social climate…But not all stocks are created equal and not all statistics are qualified properly, so always be sure you read the fine print before buying.
The mass indexing that’s occurred in the markets since the 90s has created somewhat misleading correlations and temporary causations which in turn drive assumptions that may be flat out wrong. In other words, a not-so-great stock that’s part of a popular index may be driven higher or lower by its index peers in the short term, disconnecting it from reality. For some this is oppurtunity, for others a trap – do your homework.