If records are meant to be broken then the stock market in the U.S. fulfilled its destiny this week. First up, after a 53 day dry spell, the broad large cap S&P 500 index is back in all-time high territory with a closing level of 2,118. The new high was less than a half point above the previous record set on March 2nd, but whether it is by an inch or a mile a record is still a record. For the week the index managed to gain 1.8% and it is now up 3.4% in 2015. The record close was spurred along by decent corporate earnings, which have come in better than expected, although still markedly below expectations from even just a few weeks ago. The real market magic though happened on the NASDAQ, as the composite index surpassed its dot com boom closing peak that was set all the way back on March 10, 2000 and ended Friday at 5,091. After five straight days of gains the index is now up 8.0% this year.
For a quick refresher, The NASDAQ (National Association of Securities Dealers Automated Quotations) Composite is a cap-weighted index which was launched in 1971 with 50 stocks and a starting value of 100. It took the index almost 25 years to close above 1,000, which it did in July 1995. From there the sky was the limit (for a while) as it rocketed fivefold in a little over five years to hit 5,048 at the height of the internet bubble. The index subsequently collapsed to a level near 1,100 by the fall of 2002 and has been making the long slog of recovery ever since. At the peak in 2007 the index never even cracked 2,900 and only crossed the 3,000 threshold as recently as 2012.
Today the NASDAQ Composite has over 2,500 members as it includes all stocks listed on the NASDAQ exchange. The index is skewed heavily toward technology companies, with a 44% weight to the sector (compared to 20% for the S&P 500). Historically the exchange developed as an alternative to the NYSE, which had much stricter requirements for the size of companies that could list and the volume of trading they needed to maintain. Therefore the exchange became a natural place for new tech companies to list during the rise of the internet and again today with the growth in social media.
Perhaps then it should come as no surprise that what finally pushed the composite into new record territory was solid gains from tech giants like Microsoft, Google, and Amazon. Late Thursday Microsoft announced earnings which beat analysts’ estimates by 17% and the stock jumped over 10% on Friday. Google saw 14% growth in the number of ads it sold last quarter and added over $5 billion in market cap with a gain of 3%.
Meanwhile, Amazon returned to its all too familiar ways of losing money yet somehow bested them all with a single day gain of 14%. Investors got all excited about the earnings details for Amazon Web Services (AWS) which is the division in the company that actually makes money by selling cloud computing services to other businesses. Nevertheless, under normal financial valuation it is really hard to wrap ones head around a company that is worth $180 billion yet has a forward looking P/E ratio of 957 and a trailing P/E that is negative. Put another way, Amazon has retained earnings on its balance sheet of roughly $1.9 billion, and since the company has never paid a dividend that is roughly the total amount of money the company has made since it was founded in 1994. Now for a stark comparison, just in the last 3 months of 2014 Apple had a net income of $18 billion (i.e. nine times the amount Amazon has made in 20 years). The last time the NASDAQ Composite was near current levels Amazon didn’t make money so why should this time be any different? I guess some things really never do change.
There were other records set in markets around the world this week. On Monday yields on German 10 Year bunds reached 0.07% (that’s seven basis points per year for ten years) which is the lowest value ever. Meanwhile in China, the mainland Shanghai Composite is still far from its record, but the lesser known Shenzen Composite crossed into uncharted territory this week as it capped a staggering YTD gain of 60%. Stocks in China have been on a tear lately even as economic growth has cooled. The rationale is that weaker economic fundamentals will cause the central government to unleash more stimulus measures, such as a drop in the bank reserve requirements that was done this past weekend. And while not an all-time high, Japan’s NIKKEI 225 index crossed 20,000 for the first time in fifteen years. While this is notable, it is still roughly half of the 39,000 level that was reached in December 1989.
As stocks reached new highs, bonds in the U.S. went just about nowhere. Yields on Treasuries maturing in five years or less were unchanged, while the ten year added four basis points and the 30 year gained nine. The ten year U.S. Treasury yields 1.91% as of Friday’s close.
While this week markets were mainly driven by corporate earnings results, there was also a bit of economic data out as well. Existing home sales came in well above expectations and are at their highest level in over a year. This good news was partially offset by a larger than expected decline in sales of new homes. Also, headline durable goods orders came in strong, but looked a bit weaker when adjusted for transportation items and defense spending. Next week the economic data calendar picks up a bit, with readings on home prices, Q1 GDP, personal income, consumer sentiment, and more. The big news next week though will be the FOMC meeting and the statement release scheduled for 2:00 PM eastern on Wednesday.
And finally do you ever wonder what happened to predictability? The milk man, the paper boy, and evening T.V? These were the questions posed in the opening credits of the hit 1990’s sitcom Full House and if you were still looking for those answers, you may be able to find them in the spinoff that Netflix announced this week called Fuller House. Even if you don’t relate to the modern day antics of the Tanner family, the announcement is still significant from a business perspective as its highlights Netflix’s rise in not only distributing content to consumers’ homes, but also creating it. And it comes in the same week in which two traditional distributors, Comcast and Time Warner Cable, had their $45 billion mega merger effectively killed by regulators.
Have a great weekend everyone. With temps forecast to hit 57 on Sunday in Anchorage it is starting to feel like summer!
Senior Investment Anlayst