The scariest thing about this crazed year-end rally in the Nasdaq is the inability to define its scope. Google "Nasdaq Composite" and you will see that the index has risen through 9,000 in Thursday's trading. Google "Nasdaq Composite earnings estimates" and there is virtually nothing. The only data point, is an estimate for Nasdaq 100 price-to-earnings in the Wall Street Journal provided by Birinyi Associates. Having begun my Wall Street career at Birinyi, I can attest that I am dubious of the firm's numbers, and the Nasdaq 100 and Nasdaq Composite are very different indexes, anyway.
The numbers are dated, but in examining the 10-year returns in Invesco's last quarterly fact sheet for (QQQ) -- an exchange-traded fund that tracks the Nasdaq 100 -- it's obvious that the big tech names have led the rally. In the 10-year time period ended Sept. 30, the Nasdaq 100 has posted an annualized gain of 17.6% versus the Nasdaq Composite's 14.2% gain.
Price to earnings ratios are really not helpful in and of themselves. Unless, that is, you are going to do some hardcore "ciphering" -- as Jethro on the "Beverly Hillbillies" put it -- and attempt to determine the fair value of a company based on the return it gets on its equity. Most likely you would use P/E as a historical comparative tool. Again, though, attempting to find a historical chart of forward P/Es for either of the main Nasdaq indexes will likely lead you to a chart of historical ratios for Nasdaq, Inc. the public company (NDAQ) that maintains those indexes.
So, it's a scary situation out there for the individual investor. True believers in efficient market theories, such as Burton Malkiel's "Random Walk Down Wall Street," would tell you that stock prices at the current time reflect the value of all current information. But how can that possibly be true? How can Tesla (TSLA) be worth $78 billion today vs. $50 billion little more than a month ago. Has it sold $25 billion worth of cars in a month? No, of course not. How could Apple (AAPL) be worth $1.3 trillion today when a year ago it was valued at about $700 billion? Tim Cook is good, but no public entity on Earth can create $600 billion in value in any given year.
Notice I wrote "public" in the last sentence. Government entities can and do create trillions of dollars every year. On Dec. 17, 2018, the Fed's M1 Measure stood at $3.717 trillion. Last week's figure was $4.003 trillion. So, Fed Chair Jerome Powell hasn't had the year Tim Cook has, but he has created quite a bit of value himself. When Apple shares rise, it actually costs the company more to buy them back -- and to Cook and his Board's credit they continue to do so -- but when Powell and Treasury Secretary Steven Mnuchin flood the economy with dollars, there is actually a multiplicative effect.
There's a terrific data set at the St. Louis Fed's FRED database called M1SL. It measures, simply, M1 money supply divided by the seasonally-adjusted dollar value of U.S. gross domestic product. As of the most recent data that ratio was 18.6%, up solidly from a low of 17.8% hit in the third-quarter 2018, which also happened to be the beginning of a nasty correction in the equity markets, especially the Nasdaq. A look back at the FRED's data shows de-monetization preceded the 2000 tech bubble burst and the great financial crisis of 2008 to 2009, as well.
So, if you are a stock market bull you have to have full faith in Powell. When it is extremely difficult to find even the most basic data on the most popular segment of the markets, it is better to have faith than numbers. With the S&P 500 trading at above 20-times my 2020 earnings estimate, a level that according to Yardeni research, was nearly breached at the end of 2017 (which, again, preceded a correction) but hasn't been sustainably achieved since 2002, it might be better to value faith over earnings.
