The world is different
This has been on my mind of for the past few years, that yes the world is slightly different and companies are different from how they were 20-30 years ago and perhaps that the historical valuations in terms of PE’s and other methodologies may not necessary apply.
Then to my wonderful surprise Morgan Stanley’s chief equity strategist, Adam Parker, wrote that
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“We have been publishing for years now about the apparent disconnect between the US economy and corporate earnings,” Parker writes. “The economy looks worse than earnings … but you shouldn’t argue that this disconnect between the economy and earnings won’t persist. Measurements like Okun’s Law, the Phillips Curve, the Taylor Rule, Shiller PE, and others are thrown out as ways to point out obvious disconnects between today’s world and historical economic or profit relationships.”
“People have been saying corporate margins are too high for years. Our judgment is that most of these metrics are irrelevant for making any market-based assessment in time frames less than a decade, if at all.”
Think again about Black Friday being smaller than Amazon Prime Day. This is a great example of how the new economy is taking over the old and how historical relationships between economic factors and consumption just no longer apply. You can’t use 1975 logic to analyze the 2015 world. Over 20% of companies in the top 1500 by market capitalization in the US have zero inventory dollars. The largest, GOOGL, is forecasted to be a $70 billion revenue company with zero inventory. The ways to measure the economy and corporate results are clearly different today than they were 30 years ago, when only 5% of the biggest 1500 US equities had zero inventory dollars. So, in our view, healthcare, consumer, and technology can perform well while industrials and metals and mining perform poorly. That could last for a while and doesn’t have to mean revert because in 1975 it seemed logical in some textbooks. People thought Pluto was a planet back then also, and that the Red Sox and Patriots would never win championships. They were wrong.
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Does that mean we cannot utilise anything from the past and throw away every form of valuation used? Of course not, I still enjoy building out full cash flow models to understand the link between the balance sheet, cash flows and income statements of companies but given that there are more and more companies that aren’t constrained by inventory (look at every software/cloud company), aren’t constrained by borders, aren’t constrained by language/culture, well times are different, the internet and information access has changed more than I could write on one page, thus its something to take into account whenever you look at headlines shouting “Stocks are too expensive!”
Source: Yahoo Finance
Jay
Interesting indeed. Will add it to the other twenty or so articles I’ve come across insisting the world stock markets still have significant upside (a sign of bad times to come if you look historically)