Nasdaq's new-high math: Breakout or bubble?
After 15 years on the comeback trail, the Nasdaq composite is back to its record-breaking ways. And that's got Wall Street wondering: Is the tech-packed stock index now in breakout — or bubble — mode?
No doubt last week was a historic one for the Nasdaq. The index — best-known for market excess due to the bad ending to the dot-com stock boom in 2000 — finally completed its round-trip boom-bust-boom journey.
That long, strange trip began at the Nasdaq's prior peak of 5048.62 on March 10, 2000, followed by 15 long years of trying to erase a nearly 80% loss from its depressed low of 1114.10 on Oct. 9, 2002, to Thursday's first record close since 2000 and Friday's new all-time high of 5092.08.
The general consensus on Wall Street is that the Nasdaq high circa 2015 is built on a more sturdy foundation of companies that are making money and have stocks selling at valuations that are just a tad above the historic average and nowhere near the nosebleed levels seen in 2000.
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Still, new highs attract attention and get Wall Street debating the pros and cons.
"It's a bubble," warns Axel Merk, chief investment officer at Merk Investments and portfolio manager of the Merk Funds.
Like 2000, too many investors have too little fear of the stock market, he says. This rally, which began in spring 2009 and has been fueled by cheap money policies and massive stimulus from the Federal Reserve and other central bankers around the globe, could also end badly, Merk says.
"When markets rise on the backdrop of low volatility year after year, investors become complacent," says Merk. "Central banks have fostered this complacency. However, as the Fed is trying to engineer an exit, fear may replace complacency. That's when investors may wake up, realizing that they didn't sign up for a wild ride, exacerbating any decline. As such, while the circumstances are different from 2000, a crash can happen all the same."
At the very least, Merk advises investors to lighten up on winners to lower the risk in their stock portfolios.
"Stop with the bubble nonsense," counters Brian Belski, chief investment strategist at BMO Capital Markets. "Just because prices go up does not mean there is a bubble."
To have a bubble, Belski says, you need excessive bullish sentiment, excess available credit and "sexy" investment themes, none of which are visible right now.
"This is a bull market where everyone cannot wait to call the top, that's not a bubble," Belski says. "People keep doubting Apple and Microsoft and continue to predict their imminent demise. That's not a bubble."
Money, he adds, is still not flowing into U.S. stocks. Investors are too fearful of rising interest rates, the rising dollar and lower oil prices to go all in on U.S. stocks, he adds. Nor is there a "sexy" theme like the late 1990s when all of Wall Street was calling for a new paradigm.
As a result of that lack of enthusiasm for stocks, Belski says his call that the U.S. stock market is six years into a 20-year bull market remains intact.
Jack Ablin, chief investment officer at BMO Private Bank, is on the same bullish wavelength.
"I view Nasdaq 5000 more as breakout than a bubble," Ablin says. "Valuations are stretched, but Nasdaq companies have had 15 years of earnings from the last time it hit this level. It's earnings growth this time, not clicks and eyeballs."
It's neither a breakout nor a bubble, argues Bill Hornbarger, chief Investment strategist at Moneta Group.
"Most people acknowledge that stocks generally have moved into an area that would be considered expensive, but not yet a bubble," he says. "People are still interested in stocks because there really isn't much of an alternative to drive returns in the low interest rate environment. Our counsel to clients is that price matters and since we are paying today's higher prices in the form of more expensive valuations, expect lower future returns."
Barry Bannister, chief equity strategist at Stifel, says 2015 is not a replay of 2000.
"It took 15 years for the Nasdaq to round-trip to the same price level above 5000," he says. "This time we're at more reasonable valuations than we were at the peak of the tech bubble in 2000," with the Nasdaq P-E around 21 today compared with almost 200 times earnings 15 years ago, he says.
As the economy recovers, Bannister argues, tech companies should benefit from non-tech businesses upping their capital spending budgets.
But there is one area of the Nasdaq today, Bannister says, that does look frothy.
"The health care complex looks stretched," he says, citing biotech stocks as one group that is overvalued.