Eerie Similarities To Those Before 2000 “Dotcom” Bear Market by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 1, 2015
IN THIS ISSUE:
- 3Q GDP Rises as Expected But Well Below 2Q
- November Consumer Confidence Hits 14-Month Low
- Manufacturing Sector Continues to Flirt With Recession
- Eerie Similarities to Those Before 2000 “Dotcom” Bear Market
- More Signs the Stock Market is Rolling Over to Downside
In the period leading up to the recession and bear market of late 2000-2002, the stock market was led by four large tech stocks: Microsoft, Dell, Cisco and Intel – the so-called “Four Horsemen.” These stocks continued to surge in 1999 and early 2000 even though much of the rest of the market was underperforming or moving lower. A severe bear market followed.
A similar situation exists today with the market being led, once again, by four large tech companies: Facebook, Amazon, Netflix and Google – the so-called “FANG Quartet.” These stocks continue to grind higher while much of the rest of the market is struggling.
The question is whether the market is headed for the same fate as in 2000-2002? The answer may be yes. While the talking heads on financial shows try to paint an optimistic outlook for equities, the fact is the market has gone nowhere this year – unless you consider the ugly plunge in late August as going somewhere.
As I have said in recent weeks, a collapse such as we saw in late August should not happen in a healthy bull market. As I will discuss as we go along today, there are increasing signs that the stock market is rolling over to the downside.
Yet before we get to that discussion, let’s take a look at the latest economic reports. We’ll look at last week’s 3Q GDP report which was disappointing and consumer confidence which took a big hit in October and softened even more in November. We will also look at retail sales and manufacturing which are both struggling.
3Q GDP Rises as Expected But Well Below 2Q
The Commerce Department reported last week that GDP rose at an annual rate of 2.1% in the 3Q, up from only 1.5% in the initial estimate released in late October and well off the 3.9% pace in the 2Q. The report said the improvement was due largely to consumer spending, non-residential fixed investment and state and local spending.
The latest estimate was also boosted by businesses spending more on equipment and growth in new home construction. Most economists believe the third-quarter’s respectable(?) expansion means the economy should achieve at least 2% growth in the second half of the year, which is around what is now considered its long-run potential.
While consumer spending increased by a solid 3% in the 3Q, that was down from the initial estimate of 3.2% and well below 3.6% in the 2Q.
The report noted that corporate profits dropped 1.1% in the July-to-September period and were down 4.7% from a year earlier, the weakest annual reading since the final months of the recession.
The drop largely reflects pressure on US corporations’ overseas operations due to a stronger dollar and weak global demand. The pullback underscores the challenges US corporations will face as short-term interest rates and labor costs start to rise.
November Consumer Confidence Hits 14-Month Low
US consumers were feeling less optimistic about the economy in November, according to the latest report last week. The Conference Board’s Consumer Confidence Index fell to 90.4 in November, badly missing the pre-report consensus of 99.5. It was also lower than October’s reading of 99.1. In fact, it was the lowest reading since September 2014.
The share of Americans surveyed by the Conference Board who anticipate more jobs in the coming months fell. Fewer people also expect to see their incomes increase. The percentage describing jobs as “plentiful” declined to 19.9% from 22.7% in October.
The decline in the confidence index comes after a robust month of hiring in October. Employers added 271,000 jobs in October as the unemployment rate settled at a healthy 5.0%. Yet consumers remain concerned about job security.
“Heading into 2016, consumers are cautious about the labor market and expect little change in business conditions,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.
The University of Michigan’s Consumer Sentiment Index shows a similar pattern to the Consumer Confidence Index in the chart above. It also has been trending lower since the first of the year and unexpectedly fell to 91.3 in November.
The sudden drop in consumer confidence in November raised questions about Americans’ plans for spending during the holiday season which is now upon us. The latest report on retail sales showed an increase of only 0.1% (annual rate) in October, following zero growth in September. Retail sales have been basically flat since July.
I continue to read predictions that this will be a disappointing holiday shopping season.
Manufacturing Sector Continues to Flirt With Recession
The Institute for Supply Management (ISM) manufacturing index fell to a reading of 50.1 in October from 50.2 in September. This key index has been falling all year. Manufacturers are smarting from a combination of the strong dollar and slower demand for their products.
A reading above 50 in the ISM Index indicates an economy which is expanding, whereas a reading below 50 indicates the economy is contracting. With the Index hovering only fractionally above 50 for the last three months, that raises the odds of a recession before long.
Eerie Similarities to Those Before 2000 “Dotcom” Bear Market
I have been warning about the increasing risks in the equity markets since back in March and April when I recommended reducing exposure to long-only (buy-and-hold) strategies. Risks remain elevated as this is written, in my opinion, so my advice remains the same.
The current market environment has become eerily similar to that of late 1999-2000 in the following sense. In the late stages of the bull market back in 1999-2000, most of upside momentum was generated by four exploding tech companies: Microsoft, Dell, Cisco and Intel, the so-called “Four Horsemen.”
While these four tech giants and many dotcom companies were surging, much of the rest of the market was losing momentum or had turned lower. While most market analysts knew that underlying conditions were deteriorating, there was a feeling on Wall Street that “maybe this time is different.” Well, we all know how that turned out – the S&P 500 plunged almost 45% by August 2002.
So what about the current market? Like in late 1999-2000, today’s market is dominated by four large tech companies: Facebook, Amazon, Netflix and Google – the so-called “FANG Quartet” (first letter of each company name) – which are sucking up all the oxygen left in the room. And like in late 1999-2000, much of the rest of the market is deteriorating.
At the beginning of this year, the FANG stocks had a combined market cap of $740 billion and combined 2014 earnings of $17.5 billion. So a valuation multiple of 42X PE ratio might not have seemed outlandish for this team of hot performers, but what has