The Mighty Greenspan warned in January that irrational exuberance posed a hazard to the equity market’s health. No one listened. Then the Great Buffett cautioned that U.S. stock prices had grown divorced from stock issuers’ underlying worth. Again, no one listened. Instead, the Dow Jones Industrial Average refired its engines and soared anew, reaching the doorstep of another jaw-dropping milestone — 8000 — by Friday’s close.
The names and places change, but the sentiments are rarely different for stock market watchers across time. Decades go by, but the market commentary of one year can almost always be replaced seamlessly by the market commentary of some previous year during which conditions were similar enough.
The Dow Jones Industrial Average currently sits above 25,000, although it’s gone the majority of the year in consolidation, hovering in a range just below the January all-time highs. 21 years ago today, the Dow was approaching 8,000 for the first time ever. It would break through with relative ease.
I came across a Barron’s cover story from the very week it happened in 1997.
Here are some quotes that would be perfectly at home in a brand new article written today, with only minor modifications…
Thanks to strong growth in corporate profits and a favorable interest-rate backdrop, the Dow has taken only five months to move from the 7000 level, which was achieved on Feb. 13, to stand within a whisker of the next 1,000-point hurdle. And the Dow seems sure to surpass 8000 in the near future, perhaps even this week. The jaded — and who isn’t, these days? — will argue there’s no magic in big, round numbers anymore.
The beast at hand deserves at least an honorable mention for chutzpah, for having left so many traditional valuation benchmarks behind. For instance, at today’s lofty price, the S&P 500 sports a dividend yield of only 1.73%, significantly below the 2% level at which the market began to be considered overvalued. Likewise, the index is selling for 5.3 times book value, at the upper reaches of historical bands.
Bull markets always, always, always feature a stretching out of multiples in one form or another, which is because people grow more risk-agreeable as their gains pile up and volatility becomes a more distant memory. None of this was out of order then, nor is it particularly extraordinary in the current environment. The current dividend yield of the Dow Jones is 2.17%, significantly higher than it was in July ’97, even as interest rates are significantly lower today.
The market’s price-to-earnings multiple, too, is fast approaching previous peaks. The S&P now sells for 22.33 times last year’s operating earnings, 20.56 times this year’s estimated net, and a still-rich 19.42 times next year’s projected profits of $47.15 a share.
Today, as of 7/13/2018, the Dow Jones Industrial Average currently sells at 24.17x trailing 12 months’ earnings. One year ago it was a 21x ratio. Based on consensus estimates for the next four quarters, the Dow is selling at 16.34x forward earnings. We’re in-line with the earnings multiples of 1997, which was far from the end of the 90’s bull.
Here’s a statement you could literally airlift out of ’97 and drop on any website covering the markets today:
Given a continuation of the “Goldilocks” economy — not too hot, not too cold, with inflation safely closeted — stocks, and multiples, could go higher still. In fact, bulls, bears and agnostics alike have begun to speak of a “classic blowoff,” or buying panic, that could engulf the market by year-end. “You can tell when the market is overvalued, but you can’t tell how much higher it will go,” says Don Hays, Wheat First Butcher Singer’s strategist. “This bull market has a very good chance of lasting until we reach the irrational exuberance stage.”
There were skeptics too…
To some market-watchers such behavior smacks of capitulation, and it only serves to heighten their fears. “There is no way I can turn bullish at this point because so many market measures are at extreme levels of overvaluation,” says Robert Dickey, Dain Bosworth’s bearish technical analyst.
Worse, he adds, people are “adjusting their market thinking” to account for ever-higher stock prices.
It was true then and it’s true now, though there was no meaningful timing signal embedded in this notion.
The Fed then, as it is now, was vigilant and in the process of tightening the money supply. This led to opportunities for bulls, rather than for bears…
the Federal Reserve’s move to hike interest rates in March sent stocks into a month-long tailspin, which cost the Dow and its fellow measures nearly 10% of their value. But by removing much of the market’s hot air, that momentarily miserable experience became a springboard for yet another rousing rally.
You could have printed that sentence this past spring and no one would have known the difference. We had an identical correction and snapback resolution.
And then, of course, the “earnings backdrop” was supportive, just as it is now:
If earnings can grow by 12% in the next 12 months, the market “ought to move up” 10% in Applegate’s view. A year from now, that would put the S&P at 990, and the Dow at 8700.
I’ll leave you with this thought…
People repeat history.
History is a
— PatríciaMMarcos (@PatrciaMMarcos) July 13, 2018