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Why This Old Bull Market May Not Be Ready to Die
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The NASDAQ index reached 5000 by April 2015, a level reached in the stock market boom in 2000. Yet investment strategists who were wary of the stock market in the period before the 2000-2002 collapse of the market see this market differently. The NASDAQ itself is not what it was in 2000, with the 2015 NASDAQ component stocks being different for the most part, and the healthcare and other sectors better represented in the index. Only three of the stocks in the top ten in 2000 are in the top ten today, including Microsoft. The S&P 500 trades in April 2015 at 18.5 times its company earnings for the past 12 months, compared to an historical average of 15.5, according to research firm Bespoke. A big part of the difference today is the investment climate of low inflation, which gives the U.S. Federal Reserve flexibility in raising rates. Low rates make bonds with lower yields less attractive, and increase the present value of future earnings. The yield of the 10 year U.S. Treasury was 1.917% on April 25, 2015. In April 2000 it was 6%, and in mid 2007 it was 5.3% before the financial crisis in the two periods. James Paulsen, chief investment strategist at Wells Capital Management oversees $347 billion in fund investments. He also was wary of the U.S. stock market in 1999, yet he does not see the similiar kind of risks today, and sees a long term bullish trend. The scenario he envisages is more of a pause or temporary decline. Paulsen has shifted money to European markets, as U.S. stocks are becoming more expensive relative to their European counterparts, a strategy that is being followed by other money managers since 2014. Higher price volatility is seen in the markets in 2015, with the S&P 500 up 2.9% for the first four months of 2015, and the Dow up 1.4%.
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Companies that are well established such as Apple, Microsoft, Google, Intel Corp., Amazon, make up a significant share of the index. Tech is only 43% of the index. Healthcare is 14% with names like Amgen and Gilead Sciences. And aerospace, other sectors, are part of the NASDAQ in 2015.
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Looked at this way one gets a real check on how much the money is worth today. The DJIA is still below the level in 2000 according to the figures cited by Browning, even with the nomnal DJIA at about 14250 in early March 2013. This may be part of the reason why sentiment is subdued, in addition to dependence on the U.S. Federal Reserve policies.
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Zweig says the S&P 500 has generated average investor returns of about 5% since 2000, and the NASDAQ less than 1%, making it important that investors not overpay and get caught up in the hype.
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Linked Articles
Why This Old Bull Market May Not Be Ready to Die
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