16,325!
That's where the Nasdaq is this morning and, just a week ago, we were wondering if they could hold 16,000. 325 additional points is up over 2% for the week and the Nasdaq is up 1,850 points (12.7%) since October 1st and up 3,500 points (27%) for the year. Now, I'm not going to tell you a 27% annual rally is unsustainable – I'm just going to tell you that people who say it is sustainable are idiots… Why? Math.
To demonstrate – use this link and make the "Initial Deposit" $10,000 and let's say that's your Nasdaq Portfolio. Now set "Contributions" to $0 – let's say you don't add anything to it and don't collect dividends. The "Investment Time Span is 5 years – we'll leave that for now. Then set the "Estimated Rate of Return" to 27%, compounded annually. The chart on the right shows you have $33,039 after just 5 years – up 230%.
Now change it to 10 years and you have $109,154 and 20 years is $1.19M and 30 years is $13M – see how easy it is to retire wealthy – just put $10,000 in the Nasdaq today and you're a rich man in 30 years! Even better, put $100,000 away today and you'll have $130M in 2052.
Now, you KNOW that makes no sense because everyone would have hundreds of Millions of Dollars and money would be worthless. But, if you KNOW that is impossible – then why assume these market gains are sustainable when, MATHEMATICALLY, they are not.
If you are in a market that is experiencing unsustainable gains then, at some point – IT WILL CORRECT. A correction is NOT a pullback – a correction is a move towards a CORRECT level that IS sustainable. Historically, that has been 8% annual growth.
From 2000 until 2010 the Nasdaq was below the 2,500 line and it hit 5,000 (again) in 2015 but, if we use 2010 as a base and give 5,000 points 8% growth for 12 years – we get to 13,058 – THAT is trend growth for the Nasdaq and we're 25% over that. Perhaps give us 10% for inflation and the rest is stimulus but none of that is deserved or sustainable though inflation can keep the party going for quite a while as stock prices do tend to keep up with inflation.
Another way to look at the Nasdaq's true value is to look at the P/E ratio, which had exploded to 37.69 as of June – but that was 10% ago – at 14,554. Unless Q3 earnings have jumped up considerably (they haven't), then we're probably payinig around 40 time earnings for the average Nasdaq stock – 60% more than we paid in 2018.
Now that's inflation!
Inflated prices are one thing but, when they are not backed by inflated earnings you are simply setting yourself up for a massive correction. 40x earnins means you are getting an effective 2.5% rate of return on your stock purchases and, because Banks are paying you less than 1% on cash and Bonds are paying you 2% and people are still scared to put money into housing – stocks remain an attractive alternative. You have to watch what these alternative investments are paying to get an idea of when the market might stop attracting money. That's why the Smart Money People fear Fed hikes – it makes the Bond alternative more attractive.
In any event, at 40x earnings, we are certainly coming near to the end of the run so I do urge caution. We bumped up our hedges in yesterday's Short-Term Portfolio Review and we are being extremely selective with our long positions while remaining at least 2/3 in CASH!!! – just in case the bottom does fall out faster than we think.
Be careful out there.
