Nifty Fifty Redux
Stock market veterans are far less cavalier about what happened in 1973 and 1974: an unrelenting slide that unfolded in slow motion and overtook everything in its path. Stocks seemed to fall through one support level after another, and short-term rallies were inevitably swallowed up by more selling. Between October 1973 and October 1974, the Dow dropped 40%. Individual highfliers like Avon fell from over $140 a share to under $20. "In the final months of the decline, there was just this eerie silence," recalls Dick Hoey, now chief economist and director of equity research at Dreyfus. "Conventional investment wisdom was collapsing."
Of course, unlike today, the economy was a basket case back then. Inflation was climbing fast, interest rates were on the rise, and corporate profits were declining. The knockout punch was the oil embargo and subsequent commodity price hikes following the Yom Kippur war in October 1973.
But there is one major similarity to today: overheated valuations for certain popular growth stocks. In the late 1960s and early 1970s, favorites like Polaroid and Xerox rose to unheard-of heights. Experts began to insist that conventional measures like P/E multiples didn't really apply to these Nifty Fifty stocks, which were termed "one decision" stocks because supposedly you could buy them and never have to think about selling. Now there's a New Nifty Fifty. As before, the group contains blue-chip multinationals and tech powerhouses. And once again, experts proclaim that these stocks' record P/Es aren't a problem. Shares of Coke and Microsoft, they say, can be bought and put away without a second thought.
We're not suggesting that these two giants or any other companies on New Nifty Fifty lists are about to plunge. But anytime Wall Street begins to argue that a given stock's valuation just doesn't matter is probably when it matters most. Not only did the original Nifty Fifty eventually collapse--as a group, those stocks fell further than the rest of the market.
fortune.com |
