Investors will be weighing up whether the Nasdaq approaching the pre dot-com crash peak it reached in March 2000 is a launchpad into new positive territory for America’s technology stocks, or a danger sign that the market is overheating once again, albeit to a much lesser extent.
On one hand crossing that particular threshold offers yet another reason to be bullish on the seemingly unstoppable rise of corporate America. All the key economic data coming out of the States has been positive of late. There has been falling joblessness reported, annualised GDP growth brushing 5% late last year, and rising consumer confidence. Then for good measure there is the big fall in the oil price which benefits the US consumer more than anybody else due to the low taxation on petrol there.
Something else to factor into the thinking on the matter is that the companies making up the Nasdaq are in many cases much different. In 2000 many of those making up the Nasdaq now were either not in the index at all or were radically different propositions.
Many of the companies at the top end of the index were in the relatively early stages of development and unproven as long term businesses, which was clearly a big factor in how severe the correction was when it came. In stark contrast, the Nasdaq is now a who’s who of household names.
Chief among them of course is Apple. The tech giant seems to have acquired the rather handy ability to print money at will, such is the success it has enjoyed over the past ten years. Few can see anything other than solid progress coming, even if not at the same rapid rate as over the past decade.
Then there is the argument of relative performance to throw in. With European equities not yet delivering much of a response to ECB QE, Japan and emerging markets still being a risky bet by most reckonings, and the UK about to enter a very unpredictable period politically there is some merit in the argument that the US wins by default in asset allocation terms.
While not exactly cheap, there is no reason for alarm at where US equities are trading generally based on earnings numbers, according to Threadneedle Investments US equities manager Nadia Grant.
“The market has not re-rated but has simply grown in line with earnings and we expect this trend to continue in 2015,” Grant said. “The consensus is that equities will be trading at about 15 times P/E by the end of the year, which is in line with the market’s long-term historic average. Thus, we think that US equities are neither expensive nor cheap. Given that the US is the sole engine of global growth and given how sound the recovery is, we believe US stocks are reasonably valued in relation to other markets.”
There is another side to the coin however. As the Nasdaq has joined the S&P 500 and Dow Jones Industrial in hitting symbolic numbers it could tip those who already consider US equities to be broadly expensive following the remarkable bull-run since the financial crisis over the edge in terms of moving into sell-off mode. The index has already slid back from the 5000 mark.
As well as the significance of equities entering uncharted waters there are a couple of dark clouds on the horizon as well. The Federal Reserve will sooner or later have its hand forced by all the strong economic data into beginning an interest rate hiking cycle, and anybody who says they know with certainty how markets and the economy generally will react should be viewed with a large dose of scepticism.
The economic crash resulting from the credit crunch was like no other and the therefore all the steps along the way in emerging from it are like no other before.
The other cloud creeping into view is in fact the double-edged sword of the oil price. It has certainly stopped falling, and the only way from here seems to back up, which could happen rapidly if major oil producers like Saudi Arabia cut production. If companies and investors have bet too much on these oil prices being the new normal many could get their fingers burnt.
The world’s dominant gadget maker would likely ride any storm out relatively unscathed but other Nasdaq names and US stocks are unlikely to all fare so well.
