Did You Notice This Major Index Tripling?
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
It appears that stocks are beginning to feel the pressure of the ongoing government shutdown. The longer the shutdown lasts, the more it douses investors' animal spirits, particularly as it suggests the risk of a technical default by the U.S. on its debt is increasing simultaneously. As I have emphasized previously, the latter is much the more dangerous risk -- by several orders of magnitude.
The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average both lost 0.9%. The equity options market also reflected raised concern today, with the CBOE Volatility Index increase 6.5%, to close at 17.67 -- the highest closing value since Jun. 25. The VIX, Wall Street's "fear index, is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.
Tech stocks for the triple!
Still, it's not all bad news when it comes to market indexes. The technology-heavy Nasdaq Composite Index hit an intraday milestone today, tripling off the market bottom achieved of March 9, 2009. That puts the Nasdaq (blue line) well ahead of the S&P 500 (orange) and the Dow (red), although small-caps (the Russell 2000, in green) has performed even better:
A triple in less than five years -- not a bad result! It's not entirely surprising that technology stocks (and small-caps) have outperformed the S&P 500 since they tend to sport a "higher beta" (i.e., they are, on average, more volatile than the broad market.) But the Nasdaq's outperformance in the rally substantially exceeds the amount by which it trailed the S&P 500 in the downturn that preceded it, from Oct. 2007 to March 2009.
Have technology stocks overheated? Can the rally continue? Here are a couple of relevant metrics for the Nasdaq as of Thursday's market close:
P/E multiple (est.)*
Median stock P/E multiple*
*Based on the next 12 months' earnings-per-share estimate. Source: Author's calculation, based on data from S&P Capital IQ
A price-to-earnings multiple of 25.7 doesn't look cheap, particularly when it is based on (aggressive) forward earnings estimates. But dig down into the data and you get a different view: Just two stocks, Facebook and Amazon.com , contribute 5.8 points to that 25.7 multiple -- their P/E ratios of 199 and 61, respectively, appear difficult to justify other than by resorting to "total market supremacy"-type arguments.
Conversely, within the top 10 Nasdaq components of the index, four look very reasonably priced on the same metric: Apple (11.8), Microsoft (12.6), Cisco Systems (11.1), and Intel (11.7).
Broadly speaking, technology stocks -- like the rest of the market -- look fully valued right now. But stock pickers will find some opportunities within this sector, some of which are hiding in plain sight.
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The article Did You Notice This Major Index Tripling? originally appeared on Fool.com.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Amazon.com, Apple, Facebook, and Intel. The Motley Fool owns shares of Amazon.com, Apple, Facebook, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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