Anchoring stock market predictions on valuation data that go back a century or more is a prescription for failure, according to Laszlo Birinyi.
Things have changed in a world dominated by institutional investors, hedge funds and service industries, and sentiment is as likely to drive prices as anything else, the 72-year-old former Salomon Brothers Inc. analyst wrote in a note to clients. Birinyi’s star has risen since 2009 as his bullish forecasts for the Standard & Poor’s 500 Index came true again and again.
“We are aware of clichés regarding ‘it’s different’ and ‘greed and fear are constants,’ but they are after all only clichés,” the president of Westport, Connecticut-based Birinyi Associates Inc. said in a note to clients.
“Recent developments in Amazon, Google, and Chipotle should reinforce our contention that this is not your grandfather’s market,” he wrote, citing stocks that have gained 9 percent or more in 2015, “and that trusted market measures and indicators may not be germane today.”
Take the cyclically adjusted price-earnings ratio championed by Robert Shiller, which compares index levels to 10 years of earnings instead of just one. Going by its signals since 1926, Birinyi wrote, the S&P 500 should have returned less than 1 percent a year in the decade after the dot-com bust. It returned almost five times as much.
It’s probably no coincidence that three of the four biggest bull markets of the last century have occurred since 1982, according to Birinyi. He wrote that comparing the latest one to all the rallies since World War II makes it seem abnormally long and is the wrong way of looking at cycles.
“Cyclicality suggests some norm and the oft-quoted ‘reversion to the mean,’” he wrote. “But we submit that the S&P may not be cyclical and that many metrics are therefore flawed. We have regularly argued that comparing 2009 to the average has not been productive and we have hence used the 1982 and 1990 bull markets as templates for analysis.”
In a March report, the Birinyi Associates Inc. president dismissed several signals other investors use to underpin bearish arguments. He said Shiller’s cyclically adjusted price-earnings ratio highlights how the measure “has the tendency to overstate” stock valuations and has become “the favorite fundamental argument of the bearish community.”
Shiller did not respond to a phone message requesting comment.
Birinyi has defied market pessimists throughout the 6 1/2-year bull market, writing in December 2008 that stocks had reached their lows. In September 2011, he said U.S. companies were earning too much to be dragged lower by Greece’s debt crisis. The index bottomed the next month and then climbed 14 percent through the end of the year.
If the bull market continues to track the performance of its 1990 predecessor, the S&P 500 would rise to 3,200 over the next two years, Birinyi noted. That would be a 53 percent increase from Tuesday’s close. The benchmark gauge has climbed 1.7 percent since the start of 2015.
“What we are suggesting perhaps more than action is inaction,” Birinyi said. “Stay the course, continue with what process has brought you to this point.”