NASDAQ At 5,000!

March 5, 2015

The NASDAQ hit 5,000. Maybe champagne corks were popped. Ok the NASDAQ is still short of the actual March 2000 top of 5,132. So the market still has another 100 points or so to go (high so far in March 2015 is 5,008). But let’s keep things in perspective. The high of March 2000 is the nominal high. On an inflation adjusted basis the NASDAQ is still 28% below that 2000 high. On that basis, the NASDAQ still has some work to do.

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

So what has driven the NASDAQ back to 5,000. Some just say one stock – Apple Computer (AAPL-NASDAQ). Since the lows of March 2009, the NASDAQ had gained 295% at the recent top. AAPL had gained 1,096% from its early 2009 low to its recent high. No doubt, AAPL played a key role in the rise of the NASDAQ over the past six years. It took the NASDAQ only 15 years to regain its 2000 (nominal) high. The Dow Jones Industrials (DJI) and the S&P 500 took 25 years to regain their 1929 (nominal) high. On the other hand, the Tokyo Nikkei Dow is now 25 years from its 1990 (nominal) high and it is still down 52%.

One thing that is different is that the price earnings ratio of the NASDAQ today is nowhere near those heady days back in early 2000.  As an example, Yahoo (YHOO-NASDAQ) had a P/E of 418% back in 2000. Today Facebook (FB-NASDAQ) has a P/E of 39%. Facebook seems almost quaintly cheap by comparison. One of the big winners for the NASDAQ has been biotech stocks. Fully 25% of the IPOs in 2014 were biotech. But biotech stocks can be notoriously volatile. And some become instant big winners then just as quickly big busts.

Back when the NASDAQ first went over 5,000 in 2000, the DJI was trading at just over 10,000. Today it is over 18,000. The S&P 500 peaked at 1,552 in March 2000. Today it is over 2,100. Oh and gold was $285 vs. $1,200 today. Despite the grief for gold over the past three plus years, gold has still outperformed the NASDAQ, the DJI and the S&P 500. Oh and oil prices were just over $30 vs. $50 today.

March 2000 marked the top of the High Tech/Internet bubble market. March 2009 marked the bottom of the 2008 financial crash. The question now is will March 2015 bring a market top. As has been pointed out in these columns on numerous occasions six years up for a stock market is long run. The 1994-2000 bull run ran six years although arguably one could trace that bull from 1990. The stock markets also had a six year run from 1923 to 1929. Everyone knows how that one ended. Arguably, the current market only dates from 2011. In 2011, the NASDAQ fell 18% from May to October. If one counts it from 2011 then the current market is only in its fourth year.

It is interesting noting other changes since 2000. In 2000, the US GDP was $10.1 trillion. In 2014, it was $17.3 trillion. China by contrast had a GDP of about $2 trillion in 2000. Today China’s GDP is over $10 trillion. US Government debt was $5.7 trillion in 2000. Today it is over $18 trillion. Total credit market debt was $27.2 trillion at the end of 2000. Today total credit market debt in the US is about $58 trillion. China expanded its debt even more. In 2000, China’s credit market debt was around $2 trillion. Today its credit market debt is over $28 trillion. China’s stock market as measured by the Shanghai Stock Exchange was at 1,760 in March 2000. Today the Shanghai Stock Exchange is at 3,280.

If one looks at economic growth since 2000 vs. debt growth it has taken an incredible amount of debt to grow the US and Chinese economy. In the US, it took $31 trillion of new debt to buy $7 trillion of GDP. In China, it took $26 trillion of new debt to buy $8 trillion of GDP. Despite all this new debt the US stock markets have only seen meagre gains at best. The NASDAQ is just back to about break even while the DJI has gained roughly 80% and the S&P 500 is up only 35%. The Shanghai Stock Exchange has gained roughly 86%. Debt has doubled in the US while in China it has leaped 1,300%.

Some more interesting statistics comparing 2000 with 2015. In 2000, real median income in the US was $28,237. Today real median income is $28,645. Real median household income in 2000 was $56,800 vs. $51,939 today. The US labour force was 153.4 million in 2000 vs. 148.5 million in 2015. Then the labour participation rate was 67.3 vs. 62.9 today. That is quite a drop for the US labour force considering total population has grown by 39 million.  Of the total labour force upwards of 20% are part-time workers most not by choice. The ratio of part-time workers is higher today than it was prior to the financial crash of 2008 although it is down from its peak in 2010.

Left out of the labour force are 2.3 million in prison (the most incarcerated country in the world) and many of the 6.6 million felons. In the US today there are 48.3 million retirees and 46 million on food stamps. There are 55.6 million on Medicare and 72.1 million on Medicaid. 44.3 million or 14% of the population are considered to be living in poverty. Just shy of 50% of the US population receive benefits of some sort.

I note these numbers and statistics for the US because the numbers seem to make the monthly economic numbers look suspicious against the backdrop of stock markets at record levels. Shadow Stats has done an excellent job of digging behind the numbers to show that many of them are misleading at best. A key point is that many of the numbers are actually worse today than they were in 2000 when the NASDAQ last traded at 5,000. I don’t have numbers for Canada and while I suspect they are better overall the direction is similar to the US.

The rise in the US stock market since 2009 has been largely fueled by three rounds of QE and holding interest rates at zero. While the US has seen total debt expand by $7.8 trillion since the end of 2007 household debt has actually contracted by roughly $500 billion. Most of the increase in debt has come from the US Federal Government. Corporate (non-financial) debt increased by over $1 trillion but financial debt actually decreased by $2 trillion. By those measurements QE was not getting into the US economy or both financial and household debt would most likely be higher not lower.

A factor often overlooked in the rise of the stock markets is the role that share-buyback programs may be playing. Since 2009, corporations have repurchased roughly $2 trillion of their stock. Despite that it is estimated that US corporations are still sitting on an estimated $1.7 trillion in cash much of which may actually be outside the US. There has been a somewhat similar situation here in Canada. What that suggests is rather than spending on investment that would create new jobs corporations have instead been using their cash to buy back their own stock or just sitting on the cash. These are considered unproductive uses of cash as while it helps boost the stock price it does little to help the economy.

But as noted one area that has grown is debt. It is estimated by McKinsey & Co. that global debt has grown by $57 trillion since 2009. There has been considerable debt growth and very little deleveraging. If the global economy slows thus generating fewer funds to service the debt the debt remains. The Euro zone and Japan have been sliding towards recessions. Countries like Greece and Spain remain mired in what can only be described as a depression. In 2000, the Euro was the currency of the day and everything looked bright. Instead, what happened was that Germany surrounded itself with corrupt debt ridden states that threaten to take down the entire region.

Asia has continued to grow but China continues to show signs of slowing. There is growing concern about China’s real estate and shadow banking sector. China has seen its total debt to GDP rise to 282% not far off where the western economies are. But in Asia China remains the kingpin. China continues to push the Yuan as a potential reserve currency. This shows up with the number of trade deals and currency swaps and Yuan trading hubs that have sprouted in the past number of years. In a world becoming more regionalized than globalized China is at the center of Asia.

Debt burdens have grown sharply since the financial crisis of 2009. Total global debt to GDP has gone up from 246% in 2000 to 286% at the end of 2014. Japan and the UK are the leaders with a total debt to GDP over 500%. Every Euro zone country has a total debt to GDP ratio over 300% and many are over 400% including France. Stimulating with more QE is not likely to do much because the countries, the consumers and the corporations are already burdened themselves by too much debt. The situation is not a lot different in Japan or North America. The result is that deflation is not only showing up in the Euro zone and Japan it is beginning to show up in North America as well. Eventually that could feed itself back into the stock market and the sharp rise of the past few years could quickly turn into a sharp fall.

The NASDAQ may have traded back to where it was in 2000. But today is very different then it was in 2000. On the NASDAQ, note how the slope of the rise appears to be very similar for the 1990-2000 bull, the 2002-2007 bull and the current bull from 2009. The exception was the blow off phase of the NASDAQ from 1998-2000.  The breakdown zone appears to be currently at 4,500 and under 4,000. The chart uses a 34-month exponential moving average. The odds of a blow off phase appear to be weak given the huge global debt burden and deflationary pressures. But then stranger things have happened. The central banks appear to have kept things afloat this long. Could they continue to do so?  

Copyright 2015 All rights reserved David Chapman                                           

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