The following chart shows the performance of the NYSE Fang+ index of internet platform companies, and the Nasdaq Composite, which has also broken through to a new high, along with the Russell 2000 small companies index, and the S&P excluding both technology and telecommunications companies. All are indexed to the last U.S. election date:
This rally continues to be led by a small group of companies to a remarkable extent. What is true is that all of the current leaders are far better positioned and well established than the stocks which created so much excitement 20 years ago. Most dotcom stocks never won inclusion in the S&P 500 index, but the mania around them led to ridiculous valuations for many companies. The NYSE Fang+ index currently trades at a huge 46 times trailing earnings, but valuations were even higher around the top of the last internet bubble. Cisco Systems Inc. notoriously traded at more than 300 times its trailing earnings before that bubble burst.
The more important argument in favor of the Fangs these days is that they are genuinely making profits, and have every prospect of continuing to do so. The most dramatic example is Apple, whose return on common equity is shown here going back to 1999, the point when Steve Jobs returned and started to revive its fortunes. At that point, at least when judged by its return on equity, Apple was no more profitable than the S&P 500 as a whole. That has certainly changed:
Rather than asking whether valuations can be maintained, the question now should be whether the dominant platform companies will be allowed to continue operating so profitably. Generally, it is very hard to earn returns like this for very long unless helped by an entrenched monopoly position. For the long term, bulls of the big platform companies should ask themselves whether their business models will be proof against political interference.
For the short term, however, it is time for me to acknowledge that value’s time to shine has still not arrived. It’s not good to feel like Charlie Brown staring up at the sky. But it is also worrying that investors are still not finding many opportunities outside the few dazzling big companies that dominate modern life.
A Little Bit Of Politics
But if we look at the odds on prediction markets, they are unchanged since that disaster, while the chances of Republican control of the Senate have edged up slightly. The Tulsa disaster looks at this point like a moment of catharsis or revulsion, to use the usual market terms. The people who trade on prediction markets don’t feel moved to bid down Trump’s chances any further:
After the failure of my tentative prediction about a turning point for value, let me make another one. The political noise in the U.S. is deafening at present, and President Trump has definitely had several very bad weeks. The coverage for Saturday’s great comeback rally that wasn’t has been uniformly negative. Not even the president’s usual defenders have been able to put much of a spin on an undeniable debacle. His campaign committed the deadly political sin of over-promising and under-delivering.