There seems to be a battle in the market between those who believe stocks are in, or are nearly in, a bubble (that should remind investors of 2007, 2000, or another time when the market was significantly overvalued), and those who believe all is well, things may be a bit frothy but hang in there – that kind of thing.
This could be the result of who is driving news flow.
People with boring diversified portfolios (and good on ya for that) probably see this as less of a big deal, given steady appreciation in stocks. Those with big positions in the momentum names that were hammered in the last week – one of the worst in terms of performance for hedge funds relative to the S&P since 2001, according to Goldman – might see it differently.
Really, what’s happened is that the more speculative areas of the market have been the focal point for some serious gains, and now, a good deal of selling. Sure, the biotechnology stocks aren’t at the point experienced by homebuilders and financial stocks in 2007, but who would want that anyway?
Citigroup is still down about 90 percent from its peak all those years ago. And financials are the only sector since October 2007 that still boast a negative total return (it’s not a close call, either – it’s still like negative 30 percent).
Bank of America/Merrill Lynch said in a note that the average biotech stock trades at 24 times sales, the highest since the tech bubble. Still, BofA/ML is sticking to its premise: “While we continue to recommend that investors fade secular growth stocks (and bond proxies) in favor of inexpensive cyclicals, overall market fundamentals remain favorable, and the frothy spots appear well contained. Equity bubbles rarely happen when everybody is talking about bubbles, and equity sentiment remains subdued, unlike the bullish levels of 2000.”
Whole load of assumptions in that sentence – equity bubbles rarely happen when everybody is talking about them? Sure didn’t feel that way in 2000 and 2007. And frothy spots are pretty contained when the baseline is still that it hasn’t engulfed the majority of the market the way it did in 2000.
This isn’t to say BofA is wrong on this front. The market doesn’t, as a whole, feel as overwhelmingly overpriced as it did in the 2007 period or in 2000. Indeed, even the IPO market, which has been chock-a-block with unprofitable companies, including a lot of biotech names, has not extended its gains to levels comparable to the 2000 tech bubble.
So, a bit more of a correction is certainly possible, and those who believed the market would churn its way through the year are pretty much on target for now. The S&P gained 1.3 percent in the first quarter, and a repeat of that for three more quarters for a 5.5 percent or so price change in the year wouldn’t seem out of line with expectations.
Investors should get a reasonable clue of the path of consumer spending as the nation’s automakers release data on their sales in March. GM, Ford and Toyota are expected to see smaller sales gains than Chrysler, but the hope is for slightly better sales as payback for recent weather-linked sogginess, right when the market is hoping to see such encouraging news.
Morgan Stanley sees this as the case, noting that one of its proprietary indicators of consumer activity is seeing a rebound in housing, auto sales and other consumer areas, while Goldman Sachs last week wrote that “we believe that dealer traffic experienced an inflection point mid-month,” anticipating a seasonally adjusted annual rate of car sales to come in at 16 million.