Market Measurements Lag in Changing World
The stock market gyrated more than usual last week because big investors developed jitters about high stock prices.
Consulting historic ratios of the value of corporate buildings, equipment and other assets to stock prices, experts said the market was at nosebleed levels. “U.S. stocks are overheated, overvalued and vulnerable to a bear market” is how Barton Biggs, investment strategist for Morgan Stanley, put it.
In response, the Dow Jones industrial average fell 89 points, or 1.5%, early in the week.
But others said that no, U.S. stocks were not overpriced and that new investments coming into mutual funds would keep the bull market running for some time yet. In response, the Dow regained almost 20 points on Thursday. But then the market tumbled 50 points again on Friday.
Who’s right, and what are ordinary folks to think?
That stock prices fluctuate, as the saying goes, but also that the statistics giving experts jitters are out of date and inadequate for analyzing business today.
Measuring physical assets is unhelpful when so much of modern industry’s output is knowledge.
Brainpower is far more valuable than bricks and mortar. Microsoft Corp. has $7.2 billion in physical assets, but the value of its outstanding stock is $69.4 billion. The stock value reflects the potential of the company’s employees to turn out information tools for a global economy increasingly running on software.
And the information systems they turn out shrink physical assets. “The computer scan that eliminates insurance company claim forms also eliminates the need for storage space to hold those forms,” says economist Edward Yardeni of the Deutsche Morgan Grenfell/C.J. Lawrence investment firm. No wonder real estate markets have been flat.
Clearly, the inability of statistics to accurately gauge the changing economy is a far larger story than a week’s stock fluctuations. The inflation outlook is frequently misunderstood, and government figures on productivity completely miss medical advances--knee surgery that has patients walking without cane or crutch, for example. That leads to distortions in policy.
“Health care is classed as wasteful spending when, in fact, it’s an innovative industry paying good wages and offering opportunities to young people,” says Charles Morris, an investment banker and author whose optimistic predictions in a 1990 book, “The Coming Global Boom,” have held up surprisingly well.
Investors can get a handle on this changing scene by looking beyond theory and statistics to specific companies.
Johnson & Johnson, for example, the maker and worldwide distributor of Tylenol and hundreds of other drugstore products, as well as medical wonders such as intraocular lenses that restore vision following cataract surgery, has grown appreciably faster in the 1990s than it did in previous decades.
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One reason is that the end of the Cold War has led to an expansion of global markets. Hundreds of millions of people in all parts of the world--notably in China and India--are approaching middle-class standards of living, and that includes expenditures on health.
So Johnson & Johnson stock, reflecting its greater potential and long record of success in a knowledge-intensive field, sells at a premium--currently 23 times anticipated 1996 earnings per share. That’s higher than the 17-times-earnings average of U.S. stocks but lower than companies in other global markets, including Germany and Japan.
Those comparisons also say the U.S. market is not wildly overvalued and that in an expanding world market, new perspectives--new measurements--are needed.
Motorola, the maker of cellular telephones, two-way radios and semiconductors is another company that has done much better in the 1990s, surpassing even a decades-long record of success. One reason: It’s the leading U.S. company doing business in China, where demand for pagers, cellular telephones and other gear last year gave Motorola $3 billion in sales--11% of its $27 billion in worldwide sales.
For its success in selling the products of electronic and communications knowledge across the world, Motorola gets a premium stock price--22 times earnings currently--and a market value of $39 billion, 70% higher than the $23-billion value of its physical assets. “It has broad capabilities and potential,” says analyst Douglas Christopher of Los Angeles’ Crowell Weedon investment firm.
The point, again, is that traditional measurements based on physical assets won’t suffice for analysis of the new world economy.
However, that emphatically does not mean individual stock prices won’t go down or that a majority of shares on the market can’t tumble into a new bear market--a period of falling prices that usually lasts about 18 months.
When long-term investors get jittery about interest rates or the economy’s direction, they withdraw some of their money from stocks, and prices consequently fall.
But it takes major gloomy events--the onset of the Great Depression in the 1930s, the oil price surge and political disorder of 1973-74--to cause a major market meltdown. And nothing like that is happening today.
Author Morris articulated one way of looking at the market: “The average returns in the stock market overcompensate the long-term investor, for actual risk in the broad market long term is quite modest. But they undercompensate the short-term investor because the chances of losing money in any given month are quite high.”
And when all is said, the most accurate prediction for the stock market remains that of J.P. Morgan, the legendary banker who built the company named for himself and from which Morgan Stanley and London’s Morgan Grenfell were split in the 1930s. Asked early in this century what direction he foresaw for stock prices, Morgan replied, “They will fluctuate.”
So they will, but no need to panic about that.
