Why Today’s Stock Market is Like Netflix

To understand the possible direction of the stock market, Netflix is instructive.

The movie-streaming company’s stock bounces up and down crazily on the news-and-speculation-o’-the-moment, while always ending up moving up and to the right. That lesson we learned yesterday, as better-than-expected fourth-quarter results pushed up its shares by 17%.

The broader stock market really isn’t much different. Three times since last April, the market dipped 4% or more over the course of a few weeks, accompanied each time by hand-wringing over everything from Ukraine to Ebola, and whether this really, really was the end of the bull market and the onset of a correction or, worse, a bear market. Much the same happened in 2013, prompting no less than Bank of America Merrill Lynch’s  technical analysts to predict a 20% drop. And each time the curve went up and to the right, as the S&P 500 Index rose more than 45% over the past two years.

Now the economic cycle finds itself at a new and positive inflection point, and the market is in a new funk. The S&P 500 dropped 5% between Dec. 29 and last week, with market commentary to match: The stock market is simply overvalued. Yahoo Finance had a work of “technical analysis” listing a bunch of times in the past 50 years when a decline this large had led to bigger ones.

There is no recession now — and that’s why there’s no bear market or even major correction.

Bosh. The market, like Netflix , will move up and to the right. Here’s why.

First, let’s dispense with some of the seasonal silliness that seems to accompany every market stumble.

The “most overpriced market ever” theme is about the easiest to dismiss. The Nasdaq average, to pick the most expensive major market index, closed Tuesday at 4,654, almost exactly 10% below its peak 15 years ago. In the meantime, tech earnings have multiplied.

The S&P 500, which is less of a symbol of the tech bubble’s excesses than the Nasdaq, is trading at 16 times this year’s operating earnings, exactly the average since 2000, S&P Capital IQ strategist Sam Stovall says. Compared with other low-inflation cycles like this one, stocks are almost exactly in line with even longer-term averages, he says. Most overpriced market ever? Nah.

Neither is it even worth your time to worry about the inevitable articles that make points like, five times the market has gone down 4%, it then went down 20%. Yahoo’s piece Tuesday had a raft of examples, but omitted an obvious point: Nearly all of the corrections they pointed to preceded recessions.

There is no recession now — and that’s why there’s no bear market or even major correction. In U.S. stocks, the 14% of gross domestic product that comes from exports isn’t enough to make the market stop moving higher, as it does in a normal economy. Unemployment is 5.6% and falling fast enough to make a prediction of 5% by August reasonable. GDP probably grew 2.9% last year, according to tracking estimates (even with the polar vortex). It’ll accelerate a bit this year, according to nearly every forecast.

There aren’t even convincing signs of the imbalance that will eventually cause the next recession yet. Critics of the Federal Reserve predict easy money will lead to inflation, as they have since 2009. But modest wage growth demonstrates that any excesses are minor. Housing is still undervalued, according to Trulia.com, and stock valuations are about average. All indications are that interest rates will rise only gradually, giving bond investors time to adjust. Overseas economies are more slacker than Ethan Hawke in “Reality Bites.” There’s even talk that the price of gasoline has fallen a touch.

The point is: If you don’t see a recession coming, don’t worry about a bear market. More growth means more corporate profits means stock gains. If that picture changes, you’ll see it coming, just as you did in 2008 if you were watching.

And even if a bear market comes, you should invest right through it. Because Barack Obama’s State of the Union address Tuesday night had one notable economic mistake: Stocks have not doubled on the president’s watch.

For all the day-to-day nonsense about the economy we all listen to, and all the legitimate reasons for fear amid the financial crisis, the S&P 500 has actually tripled since March 6, 2009. It’s not quite Netflix’s 10-fold gain since that same day, when a certain newspaper’s op-ed page got the market as spectacularly wrong as “Dewey Defeats Truman,” but it’s close.             source