I’ve Seen This Show Before, or Have I?

By November 9, 2017 January 10th, 2019 No Comments

When I hear the phrase, “this time is different,” especially in reference to the valuation of the stock market or a particular stock or asset class, I laugh.  Because I have heard it over and over through-out my 23 years in the market, and it always turns out that this time was no different than all the other times. It also brings me back to January 2000, pretty vividly, where I was sitting on a trading floor looking up at the TV where an analyst was being interviewed, on CNBC.  He was telling whoever would listen that Warren Buffet needed to get with the times and that these internet stocks were different, that this new economy was different.  He exclaimed the old metrics that we used to evaluate companies no longer applied to the new economy stocks.  Guess, what happened?  He was wrong, like many people before him that uttered those words.  By March of 2000, the NASDAQ market toppled, and it went from 5000 down to 1200.  It was pretty bad, to say the least.   When I hear that phrase, it makes me very skeptical about whatever they are referencing.  When I was speaking in Utah this past weekend to a hundred or so retail investors, I can’t tell you how many times I heard that phrase about the current market.  If you haven’t noticed, we are witnessing history on a daily basis.   In October 2017, we had a total of 4 negative days in the NASDAQ as it hits new highs, and the SP500 had 5 while making all-time highs.  The VIX, which is an instrument that measures volatility on the SP500, has traded and made all-time lows many times in 2017 and has stayed low longer than any time in its history.  October 2017 was the calmest stock market month ever; history shows October to be the most volatile month for the SP 500.  The SP500 has had a positive return for all 10 months this year, the first time that has happened in more than 90 years.  The SP500 has not had a single month of negative total returns since Trump was elected almost one year ago.  Until this year, the SP500 has only had positive returns in 12 straight months twice, 1935-1936, and 1949-1950.  The NASDAQ has made more all-time highs so far this calendar year, 64, topping the previous record 62 set in 1980 and the SP 500 has gone 44 consecutive days without closing down 0.5% or more; its been more than 20 years since the index last experienced such low downside volatility.   On top of all the history setting, what about valuations of the stock market and stocks?  Well, the Case Shiller PE ratio indicator is higher than it was in 1929, the only other time it was higher was 2000.  The median price/revenue ratio of the SP500 now stand more than 50% above 2000 levels.  The margin-adjusted CAPE is higher than both 1929 and 2000.  I can go on, but you get the point.

So, after listing all of that, I am supposed to tell you that this time is no different and that eventually this market will fall apart as we have never seen before.  I do firmly believe that the market will sell off, that valuations will have to come back in line and that volatility will explode.  I can almost guarantee it.   However, this time is different!  There is one major DIFFERENCE THAT WE HAVE NEVER SEEN BEFORE in the history of our economy, which they did not teach us about in business school, and that is the magnitude and the impact of quantitative easing.  Keep in mind that it was not only the United States Central Bank participating but every major Central Bank in the World, Japan, Europe, etc.  In my mind, free markets went out the door as soon as Q3 began.  In addition to this unprecedented manipulation you have Central Banks, like the Swiss National Bank buying huge amounts of US Stocks and the Bank of Japan buying $54 Billion a year of Japanese Stocks.  Again, unprecedented!  Now we have the great unwind, that the US Central Bank is beginning to do, never seen before, another unknown of its impact on global markets.

This show for the past 8 years has been unbelievable on so many levels, I have seen this show before, but this time the how and the when of the ending is what is in question.