Interview with Dan Wantrobski, Managing Director of Technical Strategy at Janney Capital Markets regarding their latest study on share buybacks, IPOs, and M&A activity found here (posted with permission). Hear Dan explain the results of this study and what it means for the stock market by tuning in this Saturday on the Newshour page here and on iTunes here along with our weekly market wrap-up and Big Picture. Excerpts below...
Do you think we are at a market top?
"The bull market has been ongoing for around 6 years now and people cite valuations with the S&P trading around 18x (as evidence for a top). They also cite a rough start to the new year with the first quarter almost in the books—the S&P is flat and the Dow is slightly down and we've seen some choppy action. You add into the mix some uncertainty surrounding the Fed and obviously a little bit of disruption on the geopolitical front and you have the makings of some bearish sentiment out there. We're of the opinion this would not be a major market top. When we're talking about a major market top...we're hearkening back to things like 2007 at the height of the housing and credit bubble. When the S&P was trading at 1500 or even all the way back to the year 2000 at the height of the tech bubble when the S&P was once again trading around 1500 or so—we do not think we're in similar territory this time. We do give allowance for further volatility this year; probably a more significant correction than we have thus far experienced but if you put it into perspective, the sentiment that's arising here surrounding the market, the S&P is down maybe 3% off the highs. A 10% correction on the S&P would get you as low as around 1900 on that index so thus far we really haven't experienced much of a shakeup despite the misgivings of Fed policy or the economy or the world at large and I think that speaks to the resiliency of this structural bull market here. So, I kind went about it in a roundabout way but we do not think this is a market top. We think, sure, volatility lies ahead but we want folks to use it opportunistically. We think you are going to get a better price point to take advantage of this structural bull market in stocks in the years ahead."
One of the big drivers that's been mentioned is stock buybacks. You recently did a study on this. What did you find?
"There has been a lot said regarding the trend in...stock buybacks and repurchase programs. And when we look at the data, it's true that it's a significant factor here but a couple of things that we see as noteworthy: number one, buybacks you could argue drove the last structural bull market on the S&P, which would be from 2002-2007 and, in fact, during that cycle buybacks eclipsed the highs we most recently achieved. So we're talking about markets breaking out to new all-time highs at a lower multiple than they were in 2007 and on less buyback activity. So we think that's rather bullish. And the way we looked at this, in prior market tops not only is there this frenzy surrounding the price of an index, whether it's the Nasdaq hitting 5000 back in 2000, but there also tends to be a frenzy of activity surrounding the stock market that comes through trading volume, M&A activity, or IPO issuance and I think relative to those past market cycles what our buyback study showed to us is you're not seeing that same type of froth surrounding those price highs on the S&P or even the Russell 2000 for that matter. So we don't think from the studies we've done that buyback data or the trends we've seen there are indicative of a major structural market top at this point."
Let's take another argument because, as the Nasdaq trades near its old tech-bubble highs, commentators have said that we are seeing signs of froth when it comes to IPOs in biotech and technology. What did your study show?
"What we did was looked at all quality IPOs dating back to 1980—so it's a pretty extensive study. Quality IPOs were non-serial issuers, greater than $5; we excluded oil and gas limited partnerships; we excluded REITs and what we found was that the peak of the IPO market to date occurred in 1996 and, even today, with year-over-year gains in IPO activity eclipsing 100% in terms of yoy nominal gains we're still well off 70% those highs we saw in 1996. In other words, we look at the IPO market as still reflating similar to housing data. When I look at housing data we've never called for another housing bubble to sustain a stock's bull market but what had happened post-2006 or 2007, housing declined significantly and has been since reflating off historical lows. To us the IPO data looks very much the same... still reflating off those lows. So, the IPO market in terms of new quality issuances is nowhere near the froth that was achieved in 1996-1997 and, furthermore, with biotech and technology, you take it a step further and around 1999 during the tech bubble, tech stocks made up about 70% of all the quality IPOs and today, well, people think there's sort of a bubble forming around biotechnology stocks—that sector makes up only about 36% of all quality IPOs today. So, again, if we want to do an apples-to-apples comparison or try to accomplish that looking at prior market tops, we're not really seeing the same conditions here. Biotech as a percent of total IPO issuance is much much lower than what technology was at the height of the bubble back in '99."
One of your contentions is that the structure of the US equity market has changed and you mention the Wilshire 5000 index as a good example of this. Please explain to our listeners why this is important.
"The peak of the Wilshire 5000 was actually in 1998. Again, we're talking about the height of that last structural bull market cycle from 1982 to 2000 that included the tech bubble and, at that time, the Wilshire 5000 actually had about 7500 stock in it. Today, that number is much much lower. Today, we have about 3800 stocks in the Wilshire 5000 so, again, it's off by about 50% from that peak of 1998, so in terms of individual selectivity—the names and the types of companies and the sectors that an investor can choose from—that has declined significantly from the peaks. So, we're talking about companies taking shares off the market vis-a-vis buybacks. We're talking about companies either going private or through mergers or acquisitions, the number of listed companies has declined dramatically. Even M&A activity, which we mentioned in that same report, has not eclipsed the peak that we experienced in 2006-2007 so relative to the amount of cash that lies—and I say this on "the sidelines"—the stock market has effectively shrunk over the last 15-20 years or so. Sideline cash—what was printed up vis-a-vis QE and is sitting as reserves, Main Street money, demand deposits, checking accounts, or in fixed income funds relative to the stock market—there's a lot of potential sideline fuel if you look at it that way. Again, relative to the structure of the equity markets, the US equity markets have changed, we think that sets up the potential for inflationary pressure. You could see the potential of too many dollars chasing too few stocks, to put it simplistically."
What about valuations? Do you think the stock market can head much higher from current levels?
"Typically, when we looked at past market tops, the S&P peaked out in the high 20s. In 2000, at the height of the tech bubble, the S&P was trading in the high 30s in terms of a multiple. In 2007, at the height of the housing bubble or the credit bubble, the S&P was trading north of 25-26x. Today, you're trading at 17-18x. Stocks aren't cheap but...neither are they ridiculously expensive like they were in prior cycles. So, that against sideline fuel or sideline cash against the structure of the equity markets and the availability and the selectivity there, we think that sets us up pretty bullish for the long-run."
Listen to the rest of this interview on Saturday with esteemed market technician Dan Wantrobski along with our weekly market wrap-up on the Newshour page here or on iTunes here. Subscribe to our weekly premium podcast by clicking here.
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