The US stock market doomsayers may yet be vindicated, but the performance of the Nasdaq 100 Index this year shows why timing is just as important as being right.
While the Cassandras have been metaphorically hoarding canned goods and digging nuclear bunkers in preparation for economic Armageddon, the Nasdaq 100 has notched a 23% return this year and is now within spitting distance of a 52-week high. No one’s guaranteeing that’s sustainable, but it should lead to some soul-searching among those who have been warning of sharp declines.
Market Rebound | The Nasdaq 100 has rallied 23% in 2023 and is near a one-year high
Who can forget economist Nouriel “Dr. Doom” Roubini’s September call for a global downturn starting in late 2022? Or Elon Musk urging the Federal Reserve to cut interest rates “immediately” in November? Or Scion Asset Management founder Michael Burry’s blunt directive on Twitter to “sell” in late January? It’s not that the bears have all been proved wrong (yet), but they were certainly early, having underestimated the durability of both corporate earnings and the broader US economy.
Bearish market narratives proliferated last year as the Fed embarked on its most daunting inflation fight in four decades, and many joined in on the gloom. Early in the year, bears were proved right as valuations contracted in response to tighter monetary policy, but they erred in thinking that the selloff would almost immediately enter a second phase in which earnings expectations were revised sharply lower.
Ultimately, it was never going to be easy for consumption and earnings to fall off a steep cliff so soon. Corporate and consumer balance sheets exited the pandemic extremely strong (though they have become incrementally worse); households accumulated about $2 trillion in excess savings (though they may have worked through more than half of it); and there’s still a deep reservoir of pent-up demand for labor, experiences, automobiles and housing (only some of which has been satisfied.) Those quirks of the post-pandemic economy have all proved to be powerful shock absorbers in the face of last year’s oil price surge, a 5 percentage point increase in the Fed’s policy rate and — most recently — a regional bank crisis in March. While they have eroded, they haven’t disappeared.
Consider excess savings. Estimates of how much Americans saved during the pandemic vary wildly, but most agree that it was in the trillions of dollars and that at least some of it remains. A Bloomberg Economics model put it at about $1.4 trillion in March, and a much lower estimate proffered by the Federal Reserve Bank of San Francisco this month set it at around $500 billion. But even the latter implies that the excess funds could buffer spending “at least into the fourth quarter.” If you stratify savings by income, even those in the lowest income levels still have significantly more in their bank accounts than they did in 2019, according to Bank of America internal data.
Oh, but that’s because everyone has been running up the balance on their credit cards, right? Not really. Household debt has been climbing from the pandemic lows, and a cursory look at the trendline might set off alarm bells.
But recall that income has been inflating as well, and revolving credit has a ways to go before reaching unsustainable levels.
What’s more, millions of US households recently refinanced their existing mortgages to lower rates, saving those who did an average of $220 on monthly payments, according to new research this month from the Federal Reserve Bank of New York. Those savings on most people’s single biggest debt payment could give them a longer runway to run up other types of debts.
Finally, the market is not the US economy. In the case of the Nasdaq 100 in particular, it’s reaping the benefits of investors’ enthusiasm for its megacap behemoths, which all count on diversified global revenue streams that can withstand a few hiccups in the US economy. The index’s concentration is often held out as a net negative — six companies account for more than half the index by weight — but that state of affairs can also help returns in times like these. The latest earnings from the likes of Microsoft Corp. and Apple Inc. have continued to defy worst-case scenarios, and that could continue for a while.
None of this precludes an eventual crash. The debt-ceiling negotiations could bring near-term volatility, but it would take unthinkable idiocy and selfishness on the part of lawmakers to allow a default. The bigger threat is from the shocks that may loom in late 2023 and 2024, when excess savings and balance sheets will look much less pristine. In the meantime, the facts merit some healthy skepticism about the index’s ability to keep going up on the back of expanding price-earnings multiples. But it may go sideways in a broad range for a while. “I’m not rampantly bullish because I think it’ll be a slow grind,” billionaire Paul Tudor Jones said Monday on CNBC while noting that he thought stocks would end the year higher.
I still wouldn’t rule out ugliness further down the road. Conceivably, economic and market resilience will only embolden the Fed to push interest rates higher to quell inflation. The latest consumer price index report last week showed, once again, that core inflation remains elevated and is effectively moving sideways. If policymakers have to take rates much higher and stay there for long enough, they will eventually break the economy. But it could take a while for all that to play out, and anyone who is doubling down on hyperbolic bearish narratives now may well have missed the key lesson of the past year: The extreme negativity is probably, at the very least, premature.
This article was provided by Bloomberg News.