This morning I read an interesting article on TraderPlanet, WARNING: SIMILARITIES BETWEEN 1998 and 2015. In the piece, Alex Manzara points out a number of thought-provoking facts about the two market time frames, but one in particular is this:
- “… profits as a % of GDP are at an historically high level, a situation which is unlikely to continue.”
Now, I don’t disagree with Mr. Manzara, as I don’t have the facts to do so, but I will bring up a current reality, which is that some “analysts” are predicting a bust for the earnings season in terms of profits.
- Analysts predict profit at S&P 500 companies will drop 5.1 percent in the current quarter after a 4.4 percent increase in the final three months of 2014, data compiled by Bloomberg show.
If Mr. Manzara is correct, and, again, I have no reason to dispute him, then that aspect of his comparison falls away a bit. Now, this is not good news for the market that profits could drop this first quarter, but it is helpful in understanding the current market to know that if profits do drop, then the much talked about P/E ratio will also decline, meaning, the market becomes more of a buying opportunity than a selling necessity.
As well, if profits do drop, then it weakens the case for a 1998/2015 market similarity, relative to the outcome of the 1998 market (collapse in 2000-2001). According to Mr. Manzara …
- The Shiller P/E ratio is at a dangerous level near 27.
One thing he does point out that is a problem, but, ultimately, might not be as big a problem some analysts suggest, is US dollar strength.
- US dollar strength is sapping the competitiveness of US exporters.
Just this morning, the US dollar broke past the 100 barrier, which means it is now approaching levels not seen since the later 90s. However, if one looks at the long-term average strength of the US Dollar, then one cans see it is just now a bit above that.
- The United States Dollar averaged 97.31 from 1967 until 2015, reaching an all-time high of 164.72 in February of 1985 and a record low of 71.58 in April of 2008.
Now, 1985 was the year the US came out of recession and began a five-year climb back to prosperity. This is what I reference when I say the US dollar at these heights might not be as big a problem as some analysts suggest. As to the late 1990s and early 2000, the US Dollar back then climbed almost to 120, so we have a ways to go before we reach that level.
My point is that although some similarities exit in the market today, the US and global economies are in a different place. Back then, the US economy was just at the height of its Internet economic boom and Japan was in already mired in deep deflation. Soon, the US would join Japan as an economy on the fritz with recession.
Today, the US economy is just now entering another, much larger boom, interestingly, derivative of the Internet boom in the late 1990s. This time, however, the companies involved are stable, solid “Internet” companies, and the technology being utilized by those companies is stable, solid, and emergent into newer and better products. We have, in fact, created the New Economy and it is beginning to take off.
Yes, it is all about the technology today, whereas back in the late 1990s, you still had much of the old guard fighting for market space. As well, many of the emerging new guard companies had ridiculous valuations (speculation), so the P/E ratios back then are simply not comparable to today.
As I write, the DIJA and SPX have turned down. Yes, the market is afraid right now, but it might not have anything to do with 1998. It might all be about a sell-off because of a sell-off, meaning, the breathless media has stirred the pot with the Fed’s raising rates stuff, and the market is reacting, and once the selling starts, it will take cooler heads to prevail. The cooler heads will prevail when they think the selling is exhausted; they then will buy and the cycle will continue.
In the meantime, speaking of technology in reference to a new era, consider the following and ask: Where exactly are we headed?
- A dozen countries, not including the United States, have banned germ line engineering, and scientific societies have unanimously concluded that it would be too risky to do. The European Union’s convention on human rights and biomedicine says tampering with the gene pool would be a crime against “human dignity” and human rights.
The above is in reference to a company set up to allow parents to select the genes they want for their children, to “perfect” those children. Think about that.
Trade in the day; invest in your life …
