Morgan Stanley's stock market guru explains why everything you know is worthless
(Morgan Stanley)
Adam Parker
Everything you think you know is wrong.
In a note to clients on Monday, Morgan Stanley chief equity strategist Adam Parker wrote that the world had changed and investors looking to old methods for valuing stocks would come up with bad answers.
Or no answers at all.
The basic outline of Parker's argument is that companies like Amazon and Google are changing the way investors need to look at companies.
Whether you're calling for corporate profits to revert to a long-term mean or looking at traditional price-to-earnings ratios, the companies that dominate today's stock market don't look like those that dominated 40 years ago.
"We have been publishing for years now about the apparent disconnect between the US economy and corporate earnings," Parker writes. "The economy looks worse than earnings ... but you shouldn't argue that this disconnect between the economy and earnings won't persist. Measurements like Okun's Law, the Phillips Curve, the Taylor Rule, Shiller PE, and others are thrown out as ways to point out obvious disconnects between today's world and historical economic or profit relationships."
Parker adds: "People have been saying corporate margins are too high for years. Our judgment is that most of these metrics are irrelevant for making any market-based assessment in time frames less than a decade, if at all."
And so this chart, which many have said must revert to something like the "norm," can stay elevated despite what the textbook might say.
(FRED)
Amazon's sales, for example, are through the roof, but the company continually pumps most of its money back into the company rather than sharing it with shareholders via a dividend (or even earnings), as investors might traditionally expect. Meanwhile, Google doesn't have any inventory despite $70 billion in sales.
And so these companies make no sense under many of the frameworks investors use to value companies.
Parker adds:
Think again about Black Friday being smaller than Amazon Prime Day. This is a great example of how the new economy is taking over the old and how historical relationships between economic factors and consumption just no longer apply. You can't use 1975 logic to analyze the 2015 world. Over 20% of companies in the top 1500 by market capitalization in the US have zero inventory dollars. The largest, GOOGL, is forecasted to be a $70 billion revenue company with zero inventory. The ways to measure the economy and corporate results are clearly different today than they were 30 years ago, when only 5% of the biggest 1500 US equities had zero inventory dollars. So, in our view, healthcare, consumer, and technology can perform well while industrials and metals and mining perform poorly. That could last for a while and doesn't have to mean revert because in 1975 it seemed logical in some textbooks. People thought Pluto was a planet back then also, and that the Red Sox and Patriots would never win championships. They were wrong.
And so when you think the market must be a certain way for this that or the other reason, Parker thinks your thinking — not the market — is the real problem.
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