On the horizon: The next great revolution in productivity.
I am not a stock market analyst, licensed broker, financial analyst nor financial planner. I do own stocks, including S&P funds. This article is not meant to be stock market advice nor a predictor of future performance. It is an economic analysis of the stock market, more from an academic, theoretical point of view, based on how I see the data. Do not make a decision on your money based on this article. I disavow any responsibility for any decision you make. You do so at your own risk.
This should be a great year to buy U.S. stocks. The market is finally realizing the promise of the dot.com boom and is poised to see the potential of the next great revolution in productivity. There will definitely be bumps in the road; but over three years or more, these should smooth out and U.S. stocks should be a good investment.
The stock market is a discounting mechanism. It takes a set of expectations on the future performance of businesses and brings it into the present. It answers questions like: How much is a company worth now that will grow at 50 percent per year for the next five years?
This shows the relative value of earnings (for some specified period of time) compared with the current price. High-growth companies tend to have higher price/earnings ratios corresponding to the higher future earnings of that company. In other words, a company that generated $1 billion in 2011 but will generate $2 billion in 2012 is worth more than a $1 billion company that will generate $1.2 billion in 2012.
When something new arrives on the scene that promises to radically change business, the market likes to jump on it, figure out its effect and place a bet on it. Whoever accurately predicts the effect of that something new stands to gain the most because they will be ahead of the curve. As more and more people realize the potential effect (and come to the same conclusion), they will place their bets in the same way.
Similarly, when something is wrong that the majority of investors don’t yet see, those with clairvoyance can make money by betting on the downside. It’s all about seeing something before other people do.
The market started to “get it” about the transformational power of the Internet around 1994. Just a decade before, the power of the PC was felt in the workplace and in homes, bidding up the value of companies like Microsoft and Intel. The stock market soared as people jumped on the Internet bandwagon.
There are only two ways for the market to get back to its long-term average:
1. Earnings go up.
2. Prices come down.
Both of these have happened, with the most beneficial being the rise in earnings. The market has grown into itself. The promise of the business gains from the dot.com era has proven true.
Now the Internet promises to radically alter the landscape all over again.
With markets converging on their long-term P/E, there’s an opportunity to capitalize on the next the “big” thing. We’ve seen a wave of transformative change take place over the last three years. Smartphones, tablets, the spread of the Internet globally and a change to a more “projectized” way of working are a few of these changes.
But the market has been held back from bidding up these changes by unsettling short-term factors like unemployment, political impasse and the Euro. These short-term factors will pass as the dynamism of the U.S. economy continues to roll ahead.
It is this dynamism that underlies my belief that the most productive and innovative years of this country are still ahead. And the market will start to realize it soon.