“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.” 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.
Inflated corporate margins are irrelevant, the new economy is taking over the old economy, historical relationships no longer apply. You can’t use 1975 logic to analyze the 2015 world.
This is scary stuff. I fear Mr. Parker might be leading Morgan Stanley’s clients to slaughter. If you are a seasoned investor, Mr. Parker’s arguments should sound familiar. The new economy thesis was paraded about by brokerage analysts during the height of the dotcom bubble to justify inflated valuations. We heard similar arguments to justify bubble prices in the housing market in 2005 and 2006. Neither episode ended well for the this-time-is-different crowd.
This time is not different. It rarely is. Profits are mean reverting. High returns on investment encourage competition and drive down profitability. It is the essence of capitalism. Does it sometimes take years for profitability to revert? Indeed it does, but for the vast majority of the investing public, the relevant time horizon is a decade or more. That is true even of retired investors. In 2015, the logic of 1975 is as useful as it ever was.
Jeremy Jones, CFA
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