Bull Market Rivals ’90s at Half Valuation as Demand Broadens
The American equity rally that just turned five years old is starting to match the 1990s Internet bubble when it comes to its speed.
That’s where most of the resemblances end.
Unlike then, when technology stocks drew 85 percent of the cash and surged four times as much as anything else, investors today are spreading their money around, sending $2 billion or more to exchange-traded funds tracking everything from drugmakers to oil drillers, data compiled by Bloomberg and Morningstar Inc. show. While gains are extending to almost every industry, they’ve only been enough to push valuations to close to half the level when the bubble popped in 2000.
Those are some of the reasons investors such as Stephen Wood at Russell Investments expect the advance to keep going. While pockets of the market such as biotechnology shares and social-network stocks show signs of froth in 2014, for most American companies, growth in earnings has kept pace with the increase in stock prices.
“We’re coming up on the fifth anniversary of a pretty brisk upward trend,” Wood, New York-based chief market strategist at Russell, said in a March 5 interview. His firm oversees more than $256 billion. “There’s a dynamic, growth-oriented impulse to these market highs. The broad-based nature of the rally is certainly different than what it was 15 years ago.”
U.S. stocks advanced last week, with the Standard & Poor’s Poor’s 500 Index climbing 1 percent to a record 1,878.04 after investors brushed aside tensions in Ukraine and American employers added 175,000 jobs in February, more than economists forecast. Since the S&P 500 fell to a three-month low on Feb. 3 amid turmoil in emerging markets such as Turkey and Argentina, the index has rallied 7.8 percent, restoring $1.8 trillion to U.S. equity prices.
The S&P 500 lost less than 0.1 percent to 1,877.17 at 4 p.m. in New York.
Resilience (SPX) like that has generated total returns for U.S. investors of 25 percent a year since the bull market began on March 9, 2009. The rally compares with 27 percent annually during the last five years of the technology bubble, a period when the S&P 500 gained 233 percent and $9.3 trillion of equity value was created, data compiled by Bloomberg show.
“We see huge gains from the bottom,” E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia, which manages about $125 billion, said by phone on March 7. “What strikes me the most is that much of the recovery was at a time that you couldn’t find many bulls around. That really sets it apart” from the 1990s, he said.
Today’s advance is more widespread. An average of 381 S&P 500 stocks have increased during each of the last five years, compared with 311 in the 1990s, data compiled by Bloomberg show. All but 40 companies were up in 2013, the most in at least two decades. At the record last week, 77 stocks hit a 52-week high, compared with 27 at the market’s peak in 2000.
The S&P 500 Equal Weight Index, which strips out biases related to market value, has added more than 29 percent a year in the current run. That’s almost twice as much as in the last half of the Internet bubble, data compiled by Bloomberg show.
As a result, the gap between the market’s leaders and laggards is smaller. During the stretch that lasted from March 1995 to March 2000, computer and software makers surged 754 percent, compared with 200 percent in the next-best industry, banks. By contrast, since March 2009, consumer-discretionary shares have jumped 324 percent, banks are up 259 percent, and industrial companies have risen 243 percent. The group with the smallest increase, phone companies, is up 68 percent.
“Confidence drives the bull,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, said by phone on March 5. His firm oversees about $360 billion. “Most people started this recovery with absolutely no confidence in the future. What we see is a return to health.”
Eighteen companies in the S&P 500 have advanced more than 1,000 percent since 2009. Among the top five, none is a technology maker. General Growth Properties Inc., a real estate investment trust, Regeneron Pharmaceuticals Inc., producer of eye drug Eylea, hotel franchiser Wyndham Worldwide Corp., CBS Corp. and insurer Genworth Financial Inc. all generated bigger returns than the next best performer, Priceline.com Inc.
During the 60 months through March 2000, 12 stocks increased by that much or more and all except four were related to technology. Cisco Systems Inc. (CSCO), the world’s biggest maker of network routers and switches, and Qualcomm Inc., a manufacturer of mobile-phone chips, soared more than 3,500 percent.
Internet and computer shares attracted close to every investor dollar that was sent to specific industries back then. Mutual funds and ETFs tracking technology companies absorbed $71 billion in 1999 and 2000, or 85 percent of the total that went to sector-focused funds, data compiled by Morningstar show.
“It was neighborhood parties, everybody talking about dot-com stocks they own,” David Chalupnik, the head of equities at Nuveen Asset Management in Minneapolis, said in a March 5 phone interview. His firm manages about $115 billion. “Today, sentiment is improving, but the market overall still is not front-and-center with people.”
Investors burned by two crashes in eight years took longer to get hooked on equities during the current bull market. After pulling $300 billion from mutual funds and ETFs that buy American equities from 2008 through 2012, they’ve since deposited almost $170 billion, according to data compiled by Bloomberg and the Investment Company Institute.
At the same time, the Nasdaq 100 Index, tracking some of the largest technology companies such as Microsoft Corp. and Amazon.com Inc., has advanced 255 percent since 2009, recouping about 75 percent of the losses it incurred during the bubble burst.
Pharmaceutical and hospital stocks led gains in the S&P 500 this year, jumping 7 percent, as investors bet new drugs and President Barack Obama’s health-care overhaul will boost profits for companies such as Tenet Healthcare Corp. and Pfizer Inc.
Health-care ETFs drew $4.6 billion, almost half of the $10 billion that sector-focused funds added through March 6, data compiled by Bloomberg show. Real estate and energy funds got $3.1 billion and $2.5 billion, respectively. Technology ETFs absorbed $1.5 billion while those investing in consumer-discretionary companies saw the biggest withdrawals among 12 sectors tracked by Bloomberg, with outflows totaling $2.2 billion.
While the S&P 500’s multiple of 17 times reported earnings is close to the average since 1937, it’s about 40 percent below where it was in 2000, data compiled by Bloomberg and S&P show.
The lower valuation reflects faster earnings expansion. Profits for S&P 500 companies have climbed an average 21 percent a quarter since 2009, almost double the growth rate during the dot-com boom, according to data compiled by S&P.
“Valuations are pretty reasonable,” Jeffrey Kleintop, chief market strategist at LPL Financial LLC, which manages $414.7 billion, said by phone March 5 from Boston. “They aren’t cheap any more, but bull markets never end with valuations at the average. It does mean that more of the gains in the market have to come from earnings.”
The Nasdaq Biotechnology Index is up 14 percent this year and less than a third of its 122 companies earned any money in the last 12 months. Unprofitable firms such as FireEye Inc. (RIY), an Internet security provider, and Zynga Inc., a developer of social video games, are leading gains in the Russell 1000 Index.
Facebook Inc. (FB), the world’s largest social network, agreed last month to acquire mobile-messaging startup WhatsApp Inc. for as much as $19 billion, the biggest Web acquisition since Time Warner’s $124 billion merger with AOL in 2001. Facebook shares have jumped 32 percent this year and are trading at 122 times earnings.
“Even within the rising tide lifting all the ships, there are some that are faster,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a March 6 phone interview. His firm manages about $225 billion. “When you look at a lot of stocks in the social-media space, they seem to exhibit all the signs of investor mania.”
The bull market entering its sixth year is less than two weeks from taking out the 1982-1987 stretch to become the fifth longest of all time, according to Bespoke Investment Group LLC. While it’s not even half the length of the 1990s technology rally that ultimately spanned 12 years, the strongest ever, the current stretch already exceeded the average of five years for other advances since 1928, the data show.
Unlike the technology rally, which was fueled by a booming economy that eventually led the Federal Reserve to raise interest rates, today’s advance was rooted in the worst financial crisis since the Great Depression, one that forced the central bank to carry out three rounds of monetary stimulus to avoid a recession. The U.S. economy has expanded at an average rate of 2.3 percent per quarter since 2009, the slowest recovery since World War II, data compiled by Bloomberg show.
“Typically by the time the market peaks, monetary policy has tightened for a number of quarters,” Michael Shaoul, chairman and chief executive officer of Marketfield Asset Management LLC, which has more than $20 billion, said by phone on March 5. “We can say today monetary policy is not tight, it’s nowhere near tight and it’s not going to be tight for a reasonable period of time.”
“Any bull market has a little bit of over-enthusiasm in it, but the euphoria hasn’t got to a point that the entire valuation of the market is now suspect,” he said. “What we’ve done in the past five years is remarkable.”
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