Do Really Stocks Finally Topping Out?
Stocks remain near their highs. But signs suggest a top, with fewer stocks pulling the load, weak job growth, and turmoil in Washington.
Like middle-age spread and male-pattern baldness, a stock market top is something whose precise beginning is hard to spot. Early vigilance can seem like paranoia (“Honey, do I look fat?”), but if it’s really happening, you don’t want to be the last to know.
Our stock market surge has stalled since March 1, and even with flaccid job growth in March and a turgid tangle in Washington, the Standard & Poor’s 500 index is just 1.7% from its all-time high. But here are some telling signs to watch.
For a start, the squadron of stocks pushing 52-week highs at the New York Stock Exchange has shrunk from 338 on March 1 to 72 late last week, and the advance increasingly is led by a few big names. Investors love Facebook (ticker: FB), Amazon.com (AMZN), and Netflix (NFLX) for good reason—the lively stock charts, the promise of not just growth but badass disruption. But if the planet really is enjoying a synchronized economic recovery, why are we lunging at these stocks as if they were the only game in town?
Before its pause late last week, Amazon, for example, rose eight straight days and snagged its sixth consecutive record peak. Its market cap gain in those eight days alone exceeded the entire gross domestic product of Paraguay or Iceland. Shares are up 51% over the past year, partly as investors gave up on bricks-and-mortar retailers, and Amazon’s market cap gain in 2017 has exceeded the entire market value of FedEx (FDX), or the equivalent of two Target s (TGT), or nearly eight Macy’s (M). As one astute reader (take a bow, @NuitSeraCalme) pointed out in a tweet: Amazon is a fantastic business, and Jeff Bezos a smart leader, but even the tallest tree in the forest cannot grow to the sky.
It’s no coincidence that the momentarily marketable Snap (SNAP) recently went public by selling shares that carry no voting rights whatsoever. You can make the case, quite rightly, that concentrating 90% of the voting power in the hands of its two co-founders lets them run the company free from pesky, short-term performance pressure. But Snap can take your money and shush you because there are many investors eager to join its conga line.
U.S. investors are still reluctant to give up on the rally—no premature evacuation here—but they’re nervous enough to start flocking to so-called “quality” or popular stocks. Since March 1, the 50 S&P 500 stocks with the biggest gains in January and February rallied another 0.3% on average, but the 50 that had already fallen the most gave up another 3%, according to an analysis by Bespoke Investment Group. The 50 already-expensive stocks with the highest price/earnings valuations gave up just 0.9%, but the 50 with the lowest valuations skidded 4.3%. The 50 stocks with the best analyst ratings corrected 1.9%, versus 2.9% for the 50 worst-rated stocks. Clearly, here is a herd that finds comfort in being part of the crowd.
Will Denyer, Gavekal’s director of U.S. research, sees some potential threats to the aging bull market. “A delayed rollout of the tax plan threatens growth, as firms will likely defer capital spending until the picture is clearer,” he writes. But with business investment already weak, delayed capital spending can lead to an economic soft patch.
Meanwhile, commercial and industrial lending has weakened since December, consumer credit growth has slowed, and delinquency rates are ticking up. “The credit cycle is already rolling over,” says Denyer. “One last spurt of growth is possible, but rising interest rates will end the party.” Nearly every recent recession has been preceded by shrinking money-supply growth, although, it must be said, not every contraction has led to recession. So it certainly bears watching when real money supply grew just 3.7% year over year in late-March, the slowest since the 2008 recession.
And as overseas growth catches up, investors might decide to funnel profits from the mature U.S. bull run to fund newer investments in Europe, Japan, Mexico, or Canada, Denyer notes. After years of outperformance, U.S. stocks started to lag behind emerging markets and Europe in 2017. Is this a preview of more to come?
BUT WHERE, YOU ASK, is the euphoria often seen when stock prices—and buying impulses—peak? On paper, there’s a faint whiff of elation: It’s only April, but the Nasdaq Composite Index has already snagged more record closes in 2017 than in any year since 1999. Yet in the heart of Wall Street’s 212 area code, the mood is hardly ecstatic, and underperforming active managers (and the brokerage firms that serve them) all are slashing costs just to keep up with passive index funds eating their lunches.
But each boom is different, so why should their euphoria be alike? The value of our stock market has reached 207% of our GDP—surpassing the credit-bubble high near 181% and the tech-bubble peak of 202%. Vanguard plans to hire 1,700 new staff members this year to cope with explosive growth in its low-cost index funds, after it added roughly the same number last year, and BlackRock is tapping robots and computers to help with stock-picking. Trillions from global central banks have already lifted stocks and bonds to giddy heights but haven’t animated the economy to quite the same extent. Anyone waiting in 2017 for euphoria to show up in loud Lamborghinis or trading-floor debaucheries just may find themselves looking, one day, into the harsh fluorescent lights that come on after last call.
Like middle-age spread and male-pattern baldness, a stock market top is something whose precise beginning is hard to spot. Early vigilance can seem like paranoia (“Honey, do I look fat?”), but if it’s really happening, you don’t want to be the last to know.
Our stock market surge has stalled since March 1, and even with flaccid job growth in March and a turgid tangle in Washington, the Standard & Poor’s 500 index is just 1.7% from its all-time high. But here are some telling signs to watch.
For a start, the squadron of stocks pushing 52-week highs at the New York Stock Exchange has shrunk from 338 on March 1 to 72 late last week, and the advance increasingly is led by a few big names. Investors love Facebook (ticker: FB), Amazon.com (AMZN), and Netflix (NFLX) for good reason—the lively stock charts, the promise of not just growth but badass disruption. But if the planet really is enjoying a synchronized economic recovery, why are we lunging at these stocks as if they were the only game in town?
Before its pause late last week, Amazon, for example, rose eight straight days and snagged its sixth consecutive record peak. Its market cap gain in those eight days alone exceeded the entire gross domestic product of Paraguay or Iceland. Shares are up 51% over the past year, partly as investors gave up on bricks-and-mortar retailers, and Amazon’s market cap gain in 2017 has exceeded the entire market value of FedEx (FDX), or the equivalent of two Target s (TGT), or nearly eight Macy’s (M). As one astute reader (take a bow, @NuitSeraCalme) pointed out in a tweet: Amazon is a fantastic business, and Jeff Bezos a smart leader, but even the tallest tree in the forest cannot grow to the sky.
It’s no coincidence that the momentarily marketable Snap (SNAP) recently went public by selling shares that carry no voting rights whatsoever. You can make the case, quite rightly, that concentrating 90% of the voting power in the hands of its two co-founders lets them run the company free from pesky, short-term performance pressure. But Snap can take your money and shush you because there are many investors eager to join its conga line.
U.S. investors are still reluctant to give up on the rally—no premature evacuation here—but they’re nervous enough to start flocking to so-called “quality” or popular stocks. Since March 1, the 50 S&P 500 stocks with the biggest gains in January and February rallied another 0.3% on average, but the 50 that had already fallen the most gave up another 3%, according to an analysis by Bespoke Investment Group. The 50 already-expensive stocks with the highest price/earnings valuations gave up just 0.9%, but the 50 with the lowest valuations skidded 4.3%. The 50 stocks with the best analyst ratings corrected 1.9%, versus 2.9% for the 50 worst-rated stocks. Clearly, here is a herd that finds comfort in being part of the crowd.
Will Denyer, Gavekal’s director of U.S. research, sees some potential threats to the aging bull market. “A delayed rollout of the tax plan threatens growth, as firms will likely defer capital spending until the picture is clearer,” he writes. But with business investment already weak, delayed capital spending can lead to an economic soft patch.
Meanwhile, commercial and industrial lending has weakened since December, consumer credit growth has slowed, and delinquency rates are ticking up. “The credit cycle is already rolling over,” says Denyer. “One last spurt of growth is possible, but rising interest rates will end the party.” Nearly every recent recession has been preceded by shrinking money-supply growth, although, it must be said, not every contraction has led to recession. So it certainly bears watching when real money supply grew just 3.7% year over year in late-March, the slowest since the 2008 recession.
And as overseas growth catches up, investors might decide to funnel profits from the mature U.S. bull run to fund newer investments in Europe, Japan, Mexico, or Canada, Denyer notes. After years of outperformance, U.S. stocks started to lag behind emerging markets and Europe in 2017. Is this a preview of more to come?
BUT WHERE, YOU ASK, is the euphoria often seen when stock prices—and buying impulses—peak? On paper, there’s a faint whiff of elation: It’s only April, but the Nasdaq Composite Index has already snagged more record closes in 2017 than in any year since 1999. Yet in the heart of Wall Street’s 212 area code, the mood is hardly ecstatic, and underperforming active managers (and the brokerage firms that serve them) all are slashing costs just to keep up with passive index funds eating their lunches.
But each boom is different, so why should their euphoria be alike? The value of our stock market has reached 207% of our GDP—surpassing the credit-bubble high near 181% and the tech-bubble peak of 202%. Vanguard plans to hire 1,700 new staff members this year to cope with explosive growth in its low-cost index funds, after it added roughly the same number last year, and BlackRock is tapping robots and computers to help with stock-picking. Trillions from global central banks have already lifted stocks and bonds to giddy heights but haven’t animated the economy to quite the same extent. Anyone waiting in 2017 for euphoria to show up in loud Lamborghinis or trading-floor debaucheries just may find themselves looking, one day, into the harsh fluorescent lights that come on after last call.
Comments
Post a Comment