Eugene, I hope you're surviving this skid.
The market seems very much like 1998. Especially the nasdaq and tech stocks. Specificly chips and semi's. In '98, the year started on a good note (after the severe Asian currency collapses of '97). It was expected that tech stocks would make a quick recovery. But after Q1 reports were out, tech company revenues were still suffering from lack of Asia demand. The dollar was too high. Asian manufacturers couldn't buy anything American.
Anyway, the market had a really severe disappointment in spring of '98, and nasdaq dove to 1500.
Fast forward to now. Again, disappointment in Q1. Ditto nasdaq dive, to 1600, so far.
But is this equity dive appropriate or an over-reaction? In mid '98, US GDP was running at the pace of $8,500 bil/yr. Currently it is $10,300 B/yr. Approx 20% higher.
So US economy grew 20%+, but nasdaq market cap grew 7% (from a very hysterical bottom).
A sceptic might say: who cares about nasdaq. It doesn't represent the economy. Fair enough. How about S&P 500 ? For sure that has to be very representative. Well, the index is now at 1054, and back in '98 it bottomed at 950. So SP500 is 11% higher now, than in lowest point of '98, when despair over Russia and LTCM was at crisis proportions prompting Fed intervention. And remember there were no bubble valuations in stock prices yet. Only irrational exuberance.
So by these two measures, nasdaq and tech stocks should be at a bottom. Maybe it will drift for another Q or two, but I don't think it can get much lower.
The other thing that is too obvious to mention is interest rates. I think Fed rates in early '98 were approx 5% or higher.
But there is one more aspect to the under-valuation. Currently the price/sales ratio of the SP500 is approx 2.25. Its 5 yr avg is above 2.5. And its high was -- oh, never mind the high. Everything was too high.
But what I want to ask is how large is the relative role of the SP500 companies in the economy now, relative to '96 or '98 ? Is it more (or less) of the GDP produced by SP500 members ? If more, then the undervaluation of stock prices is getting into even more of an extreme.
The only thing I can think of to account for the continuing selloff is that money is leaving the market in the US, and going into the Euro. If that is the case, then our problem is not stock market valuation, but currency. And that is much harder to cure. Because it needs higher rates, which of course will delay stock recovery even more.
Hey, good luck. Its been too long already.
Sarmad |
