I’m old enough to remember when every joke on Twitter didn’t begin with “I’m old enough to remember.” But after a few vertiginous days in the markets, let’s make a few more, just to clear our heads.
• I’m old enough to remember when U.S. stocks had moved higher since President Donald Trump signed a corporate and rich-guy tax cut. As of Thursday’s 3.75% decline in the S&P 500 Index SPX, +1.49% that’s no longer true.
• I’m old enough to remember when Trump knew what was in his tax-cut bill. It seems like yesterday, but Thursday was only the day that wags recycled his old tweet demanding that nobody in Washington get re-elected until the federal budget’s balanced. Which makes me older than Trump, who apparently forgets he signed a $1.4 trillion tax cut without offsetting spending cuts about 50 days ago — and has demanded big increases in defense spending since. And a wall.
• I’m old enough to remember reporters looking for regular folks posting their 401(k) balances on the internet because they had just become stock-market millionaires. And when CFRA Research strategist Sam Stovall would remark on how long it had been since the Dow Jones Industrial Average DJIA, +1.38% had dropped 1,000 points — before it did so on consecutive days.
• I’m old enough to remember when White House Press Secretary Sarah Sanders bragged about the stock market. Just not old enough to remember taking her seriously.
• And, now that the jokes are out of the way, I’m old enough to remember when U.S. stocks were expensive. ’Cause now they really ain’t.
Jonathan Clements: Why you shouldn’t panic about the stock market volatility
Well, mirabile dictu. The price-to-earnings ratio of the S&P 500 stock index is now about 16.6 times expected 2018 earnings, according to CFRA Research estimates. And that’s actually not bad for an economy growing 2.5% or better yearly, consistent with the path of the last several years (excepting 2016, hampered by China’s brief stumbles and a surging dollar).
Really, what has changed in the week since the markets were triggered into a selloff by better-than-expected gains in wages? Nothing, except maybe psychology.
One theory: The last stages of the market’s upward recent march were driven by the dreaded FOMO (fear of missing out), which made folks ride the tape even as it careened toward P/E valuations higher than almost any in history. When that happens, investors are watching the exit, ready to sell their most expensive, recently purchased shares as soon as the party seems to be ending.
And they did.
The good news about this, assuming my intuition is right, is that it doesn’t really say anything about confidence in the economy, which still seems robust. There hasn’t been any major government data this week — but the ISM services index beat expectations, with especially strong hiring prospects. And the most recent word from the Federal Reserve suggests that at least Chicago Fed President Donald Evans isn’t in a rush to raise interest rates.
Really, there’s no sign that anything much has changed about the economy since last Friday.
Profits of S&P 500 companies are still expected to climb about 19% this year, per CFRA. Trailing 12-month core inflation is still at 1.8%. Unemployment is widely expected to hit 3.5%. And like it or not, a tax cut has begun showing up in paychecks.
If these things happen, profits will materialize and stocks will recover. People who have been trying to outsmart the market for short-term gains will either lick their wounds or take their profits, depending on when they got out, and they’ll plot their next move in a climate that has the same fundamentals and isn’t abnormally highly priced.
Or, more likely, they’ll make their next bets after the market P/E drops a little more, giving them better prospects to make fresh profits as normality reasserts itself, BMO Capital Markets strategist Brian Belski says. Getting to 15 times earnings before a rebound would mean shaving another 8% off the S&P 500, for example.
“Investors should be mindful, though, that markets almost always overreact to the upside (January’s +5.6% = strongest January since 1997) and downside (-10% in less than two weeks),” Belski said in a note to clients Thursday night. “Market bottoms are a process and typically take time to prove themselves through re-tests and duration. However, analysis does show us that some of the worst days in history portend to better performance directly following sharp periods of weakness.”
Sounds about right, even if it’s impossible to assess whether Monday will have the “best chance” to be the bottom, as Belski wrote.
It’s a hopeful scenario, and probably the likeliest. But I have a confession: I buried one piece of fake news in this column.
Trump never understood what was in his tax bill.