For Markets, This Time Is Different--Again
“This time is different” was the mantra of the 1990s boom years for the economy and the stock market. “Different” meant that, unlike previous booms, the ‘90s version didn’t have to end badly--or maybe didn’t have to end at all, according to many of the era’s raving optimists.
Now, two years into the bust that wasn’t supposed to be, “This time is different” is an apt description of the current market situation:
* Despite plenty of signs that the U.S. economy is continuing to rebound, the stock market, as measured by key indexes, is careening toward new three-year lows. The Standard & Poor’s 500 index slumped 1.8% last week, ending Friday at 989.14. The blue-chip S&P; is down nearly 14% year to date, and is just 2.4% above the three-year closing low of 965.80 reached on Sept. 21.
That’s a lot of numbers to make a simple point: The bear market that began in March 2000 may still be large and in charge, even amid an economic recovery. History says it isn’t supposed to happen this way.
* History also says that lower interest rates are supposed to be bullish for stocks. But the dive in long-term Treasury bond yields over the last five weeks has been mirrored by five consecutive weekly losses in equities.
The yield on the benchmark 10-year Treasury note has tumbled from 5.25% on May 17 to 4.77% as of Friday. In the same period the S&P; 500 has dropped nearly 11% and the Nasdaq composite has plummeted 17%.
Federal Reserve policymakers will meet Tuesday and Wednesday, and they are expected to keep their principal short-term interest rate at 1.75%, the 40-year low the central bank has maintained since December. Despite the widespread view that the Fed may not raise rates until 2003, many investors have continued to prefer the near-zero returns on money market funds and bank deposits to taking a chance on stocks.
As the picture on Wall Street darkens, of course, investors ought to be allowing for the possibility that a turnaround is near. That would be the classic sequence: Just as the last potential buyer gives up hope for higher stock prices, a rally ensues.
Unless, that is, “This time is different.”
It can’t be much comfort to most investors that stocks are on the verge of recording the longest bear market since the 1940s.
If the S&P; 500 and other major indexes break below their Sept. 21 lows, they will extend to 27 months the decline that began in March 2000. That would exceed the 21-month bear market of 1973-74, which now stands as the longest since the 1940s.
The drop in the S&P; 500 index, however, was 48% from the peak to the trough in 1973-74. At Friday’s close, the S&P; has given up 35% of its value, so far, from its March 2000 peak.
The decline has been far worse for the technology-dominated Nasdaq composite, which at Friday’s close of 1,440.96 was off 71% from its record high in 2000.
Some Wall Street pros contend that the last bear market in fact ended on Sept. 21, in the panicked selling that followed the terrorist attacks. That gave way to a powerful fourth-quarter rally that lifted the S&P; index as high as 1,172 by Jan. 4, a 21% gain from the Sept. 21 low.
If you subscribe to the idea that a 20% gain marks a new bull market, then one was born in the fourth quarter--only to quickly wither this year, at least as measured by the S&P; and Nasdaq.
Advocates of the new-bull-market idea point to the relative strength in smaller stocks this year, and the hefty gains in many non-tech stock sectors that had been out of favor in the late ‘90s, such as home builders, gold miners and defense contractors. The bears still may be having their way with the old market leaders (especially tech), but it has indeed looked like a new bull market for a lot of other stocks.
Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York, argues that this year’s decline in key indexes “is a continuation of the same bear market,” because the S&P; 500 failed to reach a new high in its post-attacks rally.
In any case, labeling this market phase amounts to little more than hair-splitting for investors who’ve simply held on to blue-chip shares and technology names for the last two years, and now are facing the strong possibility of a third straight calendar-year loss.
The S&P; 500 hasn’t fallen in three consecutive calendar years since 1939-41.
The average mutual fund that owns big-name growth stocks is down 17.8% this year, after sliding 23.6% in 2001 and 14.1% in 2000, according to Morningstar Inc.
Given the unprecedented gains recorded in blue-chip and tech stocks in the late ‘90s, perhaps it shouldn’t surprise anyone that the hangover from the boom is so severe.
The times were different in the late ‘90s: Never before had the S&P; index posted a total return of more than 20% a year for five consecutive years, as it did from 1995 to 1999.
At its peak in March 2000, the stock market was widely viewed as priced for a “perfect world”--one of unchallenged U.S. dominance, rising prosperity and soaring orders for new technology, among other things.
Since that world has disappeared, investors have been struggling to re-price equities for a decidedly imperfect future. Likewise, global investors have of late been re-pricing the value of the dollar relative to other currencies. As the dollar has sunk, so too has the value of U.S. assets as foreigners perceive them.
In theory, when investors find that stock values and the dollar’s value fairly reflect the current state of the U.S. economy and its prospects for the next few years--meaning, the risks are balanced by the potential returns--the downward re-pricing cycle will end, setting the stage for a new advance.
Some market pros believe we’re just about there.
“At some point soon I think the view will shift that we have re-priced [for a new environment], and that the economy isn’t going down a black hole,” said Scott Grannis, economist at Western Asset Management in Pasadena.
Despite the dollar’s sharp decline in recent weeks against the euro in particular, Grannis argues that the greenback is merely “correcting” after dramatic gains in the last few years. He notes that at 97.1 cents on Friday, up from 89 cents at the start of this year, the euro’s value still is 17% below where it began life on Jan. 1, 1999, at $1.17.
As for stocks, the decline in prices in recent weeks, while Treasury bond yields have fallen simultaneously, should be making equities much more appealing compared with bonds, Grannis said. “With the decline in bond yields, stocks are becoming cheap,” he said.
If that’s true, it should be even more so when comparing stocks with money-market accounts and bank saving accounts yielding in the 1% range.
Edward Yardeni, investment strategist at Prudential Financial in New York, notes that the total of currency held by the public, plus cash in short-term accounts such as money market funds and bank savings deposits, reached $5.8 trillion in early June, up from about $4.5 trillion at the start of 2001.
“Once the uncertainties that hang over the market dissipate, there’s plenty of liquidity to fuel a rally in stocks,” Yardeni said, assuming the economy remains in recovery mode.
But how cheap is cheap enough for stocks in this now-imperfect world of diabolical terrorists, untrustworthy corporate accounting and outrageous self-dealing by unscrupulous chief executives at their shareholders’ expense?
Blue-chip stock price-to-earnings ratios have come down since October, on average. But based on Standard & Poor’s estimate of S&P; 500 companies’ earnings over the next 12 months, the S&P; index is priced at 19 times earnings.
By historical standards that is still expensive, many experts say. They are countered by those who say a 19 P/E isn’t high given low inflation and low yields on competing income-producing investments.
The potential problem with all market predictions is that they are largely rooted in the historical experience. If “this time (continues to be) different,” history may be of little help. This market just tends to make it up as it goes along.
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to: www.latimes.com/petruno.
