Goldman Sachs believes that the recent decline in the stock market (in tech and IBB in particular) is not indicative or the repeat of the 2000 top. Let’s take a look.
The short answer, according to Mr. Kostin: Current valuations and the market’s historical performance indicate it’s unlikely that the S&P 500 and the Nasdaq Composite are poised for similar 50% and 75% declines they suffered in the early 2000s. The bull market since March 2009 is likely to remain intact. “We believe the differences between 2000 and today are more important than the similarities and the recent momentum drawdown is unlikely to precipitate a more extensive fall in share prices,” he said in a note to clients.
While I agree that we will not suffer a 50-75% on the DOW, momentum tech stocks are another matter. Further, why would the bull market of 2009-2014 remain intact? There is no rationale behind such thinking. I have already outlined the 5-Year and the 17-Year cycles (among many others) that basically kill any hope for continuation of this bull market.
Even the stocks hit hardest this year aren’t nearly as overvalued as they were in 2000. The S&P 500 biotech index, for example, traded last week at about 29 times component companies’ earnings, which is above its median of 26 but far below the level of 57 at which it traded in 2000. The Morgan Stanley Technology Index trades at 22 times earnings, near its median of 23 and far from the 65 level of March 2000.
Yes, of course, the valuation argument. As I suggested before, today’s valuations are incredibly expensive. Much more expensive than they were at 2000 top, even though various valuation metrics do not reflect it. Why? Most of the earning over the last 5-Years were the direct result of a massive credit infusion by the FED. If you take such earnings out, the valuations you will see in today’s market will be astronomical. To the tune of P/E ratio of 50 – 80, making today’s market no only highly speculative, but “Are you f&#$ing kidding me” expensive.
Once the bear market of 2014-2017 starts, you will see P/E ratios surge as earnings disappear. In the same fashion they did in 2007-2009, going from 18 to 128 at the height of the recession. In fact, our mathematical and timing work clearly shows that we will go through such a severe bear market between 2014-2017. If you would be interested in learning when this bear market will start (to the day) and its subsequent internal composition, please Click Here.
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Goldman Sachs: Why This Isn’t 2000 All Over Again
Check the calendar. Turns out this isn’t the year 2000. And it isn’t Groundhog Day either.
Goldman SachsGS +1.24% is telling clients that the stock market is unlikely to pull off a repeat of its antics in March 2000, when the tech bubble peaked and a market crash ensued.
The selloff in the so-called momentum names, such as biotech and social-media stocks, “dominated client discussions” last week, with many investors concerned that the selloff among these high fliers could lead to more widespread weakness, said Goldman Sachs’s stocks strategist David Kostin.
Two questions that Mr. Kostin says garnered the most attention from clients: “When will the reversal end?” and “Will the sell-off in momentum stocks drive a market-wide price decline as occurred in 2000?”
The short answer, according to Mr. Kostin: Current valuations and the market’s historical performance indicate it’s unlikely that the S&P 500 and the Nasdaq Composite are poised for similar 50% and 75% declines they suffered in the early 2000s. The bull market since March 2009 is likely to remain intact.
“We believe the differences between 2000 and today are more important than the similarities and the recent momentum drawdown is unlikely to precipitate a more extensive fall in share prices,” he said in a note to clients.
The S&P 500 is 4% off its record high hit earlier this month. The Dow Jones Industrial Average has dropped 3.3% for the year. The tech-heavy Nasdaq Composite, which has suffered the brunt of the selling in recent weeks, is down 8.2% from its 14-year high hit early last month.
Goldman isn’t the only one suggesting comparisons to the previous tech bubble aren’t warranted. As others have noted, stocks in general still aren’t nearly as expensive as they were in 2000. That is one reason selling has focused mainly on the volatile Nasdaq while the Dow Jones Industrial Average, made up of more-established blue-chip stocks, has been less-affected.
Back in 2000, broad stock indexes had been rising at 20% annual rates for five years. The S&P 500 was trading at 29 times its component companies’ earnings for the prior 12 months, according to Birinyi Associates. Inflation was running at 3.8% and the Federal Reserve was raising interest rates in an effort to cool off the economy.
Market watchers have noted in recent days that much has changed this time around. Inflation is running at just over 1%. The S&P 500 trades at 17 times earnings, slightly above average but far from 2000 levels. While the S&P gained 30% in 2013, it was up 13% in 2010 and 2012 and little-changed in 2011. Economic growth has been running below 3% and the Fed has been stressing how reluctant it is to raise its target interest rates any time soon.
Even the stocks hit hardest this year aren’t nearly as overvalued as they were in 2000. The S&P 500 biotech index, for example, traded last week at about 29 times component companies’ earnings, which is above its median of 26 but far below the level of 57 at which it traded in 2000. The Morgan Stanley Technology Index trades at 22 times earnings, near its median of 23 and far from the 65 level of March 2000.
Goldman calculates a basket of momentum stocks has dropped 7% from its recent highs. Since 1980, there have been 46 other instances in which momentum stocks suffered similar declines over comparable time frames. Following those selloffs, the S&P 500 averaged about a 5% gain over the following six months, while those momentum names dropped another 4%, on average.
“The S&P 500, but not momentum, will likely recover during the next few months,” Goldman’s Mr. Kostin says.