The strength of the US dollar is no longer a secret. It reflects both the attractive force of the US economy relative to the rest of the world and the safe haven of the main trading currency in the world.
Although the S&P 500 generates 40% of their income abroad, and thus a strong dollar brings atrophy to the sales and profits abroad, the rapid surge of the dollar should not be an obstacle to other stock gains, believes Tony Dwyer, chief US strategist at Canaccord Genuity. The strategist wants to dismiss the myth that a strong dollar is unfavorable for large US multinationals and, by extension, for the S&P 500.
Back on the rise from 1996 to 1998
Mr. Dwyer refers to the period between 1996 and 1998 and draws some parallels with the current context. At that time, the world economy was slowing and the US economy accelerated again, five years after the start of his recovery.
During this turbulent period, the valuation multiple of the S&P 500 rose from 14 times earnings in 1995 to more than 20 times in 1998, even though the strong dollar had then slowed earnings growth of the Index companies.
The S&P 500 on the way to 2340?
Mr. Dwyer is convinced that the US stock market will continue its momentum as more and more investors realize that there is no better place than the actions to get decent returns. The strategist among the most optimistic say that the S&P 500 will aim at 2340 by the end of 2015, for a potential gain of another 15%. The analyst recommends his customers to finance priority sectors, technology, industrial and health to build on this momentum.
Ed Yardeni, president of Yardeni Research, shares some advice. “As long as the global slowdown remains orderly, it benefits the US economy by reducing the cost of natural resources, including oil and interest rates,” wrote the economist.
Moreover, this assumption has been already realized with the S&P 500 bouncing by 12% since October 15, noted for his part Martin Roberge, Canadian quantitative strategist at Canaccord Genuity.
The Federal Reserve will conduct its own assessment of banks
Meanwhile, faced with accusations of complicity with the big names on Wall Street, the Federal Reserve will conduct an evaluation of its major banks monitoring procedures, as it declared on Thursday in a statement.
The Fed said it had asked its inspector general to pass under review “methods” used by regulators in different regional branches of the Federal Reserve System to “get all the necessary information” on the part of banks that are subject to monitoring.
The Inspector General will also study the internal modes of communication including how regulators can “be aware of differences of opinion” among auditors to make this banking supervision.
The Fed’s board will also assess itself its own monitoring of the most important financial institutions. The study will focus on whether regulators “receive the information needed to make sound and consistent decisions regarding the supervision of the largest banking organizations and complex,” says the Fed.
These internal reviews come as the New York central bank was recently accused of connivance with some Wall Street giants it is supposed to monitor, including the investment bank Goldman Sachs.
The president of the Central Bank of New York William Dudley is to testify Friday before a Senate committee during a hearing on the improvement of banking supervision by the central bank.
In the speech he is to deliver before the senators what was published on Thursday on the Federal Reserve site, Dudley said that the Fed examiners were observed every three rotations to five years to better understand the institution they oversee “without sacrificing their independence.”
He also indicated that concrete steps had been taken to encourage these examiners “to speak”, which is seen as a “primary jurisdiction”.
In September, a former employee of the New York Fed revealed in records dating back to 2012 how regulators Goldman Sachs did not dare confront this bank on a transaction they nevertheless felt to be “shady”.
It was a transaction between Goldman Sachs and Banco Santander, where the Spanish bank, summoned to increase its capital by European regulators to absorb any shock, was tipped to transfer part of its assets to its US partner to more easily achieve the required threshold of equity.
The former employee of the Fed, Carmen Segarra, licensed in May 2012, said she was dismissed because of his lack of deference vis-à-vis Goldman Sachs. The New York Fed rejected this interpretation arguing that the dismissal of the examiner was linked to performance.
More recently, two Goldman Sachs employees were dismissed for relaying confidential information obtained from the New York Fed and concerning a pending transaction with Goldman Sachs. A young banker, formerly employed by the New York Fed before joining Goldman Sachs, obtained information from his former employer regarding a transaction of the bank and passed them to a superior. Both men were dismissed, Goldman Sachs claiming to have “zero tolerance for this type of behavior.”
In the speech he will deliver Friday, William Dudley, himself a former head of Goldman Sachs, recognizes “that there are risks to become too close to the firms they supervise.”
“We work hard to avoid these risks (…). Of course we are not perfect,” he said.
“We cannot identify and correct all errors of financial institutions and sometimes we make mistakes,” said Mr. Dudley again. “But good measure of our effectiveness in monitoring is to improve the strength and stability of banks since the financial crisis,” he assured.
Nasdaq: records follow but not alike
When the Nasdaq reached 4700, it was only a matter of time before it broke its old record of 14 years. And this event will remind us about an entire era.
On 10 March 2000, the Nasdaq thermometer, most known for Internet and technology stocks, reached its ultimate summit of 5049. A little over two years later, the index had fallen more than 70 % puncturing one of the most spectacular financial bubbles of all time.
Imagine, then, that 14 years later, the summit comes in sight. In fact, one can almost say that it is only a matter of time. Indeed, Nasdaq is missing only 349 points to regain its top, a rise of 7.4%. When we consider that the index rose by 19% last year and 12.5% so far this year, it seems far from being a very high step to mount.
In addition, when we know that analysts expect earnings growth of 18% for securities of the Nasdaq in 2015, we can assume that it is only a matter of time, mathematics making the biggest work.
Surely there will be hesitation as we will approach this mark, probably more for psychological than financial reasons. This march to new highs also likely to revive some bubble cries.
All this will wake up very bad memories among many investors. The bursting of the tech bubble and the Nasdaq was very painful. Looks like the world’s economy cannot afford Nasdaq 2.0.
The likeness might be traced between the peaks separated by 15 years, but they are far from identical.
A very different Nasdaq
The Nasdaq index today is very different from the turn of the millennium. Imagine, the current Nasdaq even offers an interesting dividend, equivalent to a yield of about 1.5% against a thin 0.3% in 2000. At that time, no one spoke of dividends.
In fact, profits were rare and in some cases, the revenues were absent. Many business models were based on new concepts such as “page-views”, the “clicks”, etc.
There is no saying that the Nasdaq is a bargain at 23 times earnings, its current assessment according to data from the Barron’s financial weekly. But it makes much more sense than the price / earnings ratio of 175 in March 2000.
Today, companies that are part of the Nasdaq have matured and their business models are much more experienced and strong.
It must be added that many of the companies that were at the center of the bubble in 2000 are simply missing now, leaving more room for new companies in new sectors. For example, consumer discretionary accounts for about 17% of the Nasdaq, 16% of health care. Information technologies remain dominant at 48%.
The index currently holds 4715 titles against 2565 there used to be 14 years ago, about half less. What a combination!
If there has been a resurgence of life for two years in the entries of new companies on the stock market, it is nothing compared to 2000. We counted 630 initial public offerings (IPO) between 1999 and 2000 the technology sector. In the 13 years that followed, a total of 462 IPOs techno has been made.
IPOs today are fewer, but with higher quality. In 2000, the median age of the company entered the stock market was five years against 10 years today.