https://www.wsj.com/articles/how-to-read-the-myopic-market-11583685581
Happy 20th anniversary Tuesday to the Nasdaq index peak of 5049 back in 2000, zenith of the dot-com era. After observing our current beer-head frothy market for months, I was an idiot for thinking I could hold off until today to write a warning column. The market always trades to maximize pain. So, ouch.
Time waits for no one. One thing I’ve learned investing is that for every stock there’s this invisible arrow pointing to some moment, some time in the future, that markets focus on to evaluate it. That time horizon isn’t published anywhere; it’s something you feel, an equity duration. Typically, it’s 12 to 18 months.
Euphoria drives that arrow out years. Beyond Meat was selling at 20 times 2020 revenue, Apple stock boomed even with flat-ish iPhone sales, and Tesla stock did Icarus-like figure eights close to the sun. But Nasdaq and the entire market have done so many daily ascents and drops and barrel rolls since their peak Feb. 19—it’s now a coronavirus roller-coaster market. Why? Because uncertainty can collapse time horizons to months or even tomorrow.
Remember, a stock’s value is the sum of all future profits discounted back to today. It’s dependent on profits, growth and risk. Investors estimate future profits and growth rates, but risk? Again, you can’t look that up anywhere—it’s just a feeling based on interest rates, competition, world events and more. Beyond Meat seemed to be priced for five years out. Risk is in the eye of the beholder. So investors use a shorthand: A price-to-earnings multiple that provides some hint to how far out the market is looking. In May 1999, Yahoo’s P/E multiple hit 1,062!
Twenty years ago, we had this new internet thing, a loose Federal Reserve, AOL juicing startups in exchange for IPO shares, and momentum investors, or momos. Like ants to a lollipop, momos crawled into dot-com stocks, pouring in price-insensitive money that attracted even more momos. George Soros’s hedge fund might have been the last one in. After the Federal Reserve flooded the world with dollars to mitigate the nonexistent Y2K threat, it pulled back in early 2000 and markets reversed. Momos became nonos. After 9/11, when time horizons collapsed from years to months, Amazon’s stock had fallen 94%, to $6.
Today’s market madness features fewer IPOs, but the loose Fed and momos are present and accounted for.
For money-losing companies like Uber and Lyft, their stocks are priced for the imaginary day when they’ll rein in oversize marketing costs and show “normal” earnings. WeWork’s implosion reduced the market’s appetite for huge earnings extrapolations, so lossy tech valuations came in months ago.
The coronavirus has been the sword of Damocles hanging over markets lately. The virus threatens to expand exponentially, with almost endless 14-day incubation quarantines. China’s economy is probably down double-digits in the first quarter. Flights to infected regions have been curtailed. Outbreaks are multiplying in the U.S. Everyone knows this but is waiting to see if the outbreaks will become a pandemic. The uncertainty is killing stocks and commodities.
Spending will soon shrink (with the exception of everyone buying 10-year supplies of Purell and Campbell’s Soup). Apple and Microsoft were the first signs of trouble. Some things will roll over and may not come back: Higher-than-a-kite cannabis stocks are down 70%.
That invisible arrow that normally points out 12 to 18 months has been pulled in. It’s almost as if we’re reading the news day by day to figure out whether a pandemic will mean years of down earnings or if corona will flame out and leave a quarter or two of earnings glitches.
Is the market cheap yet? Apple stock is selling at 21 times the average estimate of $13.51 in 2020 earnings. The S&P 500’s P/E ratio is about 18. Then again, 10-year Treasury yields dropped below 1%, which has happened, uh, never. So old valuation models are worthless.
For a hint about what markets will do, try to grasp that invisible arrow’s time horizon. My guess is that they’ll yo-yo until earnings growth is comfortably assured. A coronavirus vaccine could be a first clear sign. Another would be the rate of change of U.S. virus cases, or rather the second derivative—when the rate of change of the rate of change goes negative, that might be when markets head north again. Keep your dry powder ready, but choose stocks for the next cycle, not the last one.
