Dollars and Sense: U.S. Stocks continue to soar despite a global slowdown

Nasdaq soars. The Nasdaq exchange hit a record high Thursday. It rose to a new record on Friday. The Nasdaq tends to be heavy with tech stocks, and it was therefore hit particularly hard by the 2000 tech bust. It has taken longer to recover to its former level than either the Dow or the S&P 500. But recover it has. It’s up nearly 7 percent for the year, far above the Dow and the S&P 500. On Thursday it beat by a few points the previous all-time closing high of 5,048 set on March 10, 2000, just before the dot-com bubble became the dot-bomb crash. It’s also worth noting that Japan’s Nikkei stock index closed above 20,000 for the first time in 15 years.

What’s different this time? One should never say never, but the Nasdaq of 2015 looks very different than the Nasdaq of 2000. The companies of today are not just dot-coms with no revenue or earnings. The internet companies include Google, Apple, and Facebook, which not only have earnings, but in some cases—such as Apple—have massive earnings. And biotechnology is a big part of the technology picture today. Pharmaceutical company Gilead Sciences has a market capitalization of $154 billion. It’s risen 12 percent this year and 52 percent in the last 12 months. Amgen, with a market size of $129 billion, is up 6.2 percent this year and 46 percent in 12 months. Biogen has soared 27 percent this year alone. If you get lost in the numbers, just remember this: These are real companies with products and customers and—for the most part—robust balance sheets, not just ideas. And that’s very different from 2000.

Earnings exceed expectations. This earnings season has been mixed, but expectations were fairly low, so even these mixed reports beat expectations. Historically, about 63 percent of S&P 500 companies beat earnings expectations. But this quarter that number is above 70 percent, though revenue has been a problem. Only about 42 percent of companies beat revenue expectations. The key issues have been currency exchange rates and a slowing global economy, especially in China. The U.S. dollar has gained about 9 percent since the beginning of the year, and that has had a significant impact on U.S. companies with overseas operations.

China syndrome. Speaking of China, its central bank lowered the amount of money banks need to keep in reserve by 1 percentage point, a move designed to spur economic growth there by freeing up more cash banks could use banks to lend to small and mid-sized businesses. This is part of an ongoing relaxation of regulation in the Chinese economy. China has massive problems still. Its one-child policy is having a devastating impact on the country. Religious, free speech, and human rights violations remain common. But the latest move indicates relaxation of the command-and-control economy. The hard questions in the years ahead for Western policy makers will be to decide how much movement is enough, and how to keep that movement going. It’s also important to note the Chinese economy has far more than doubled in size since 2007, so the current level of 7 percent growth is having a much greater impact on the global economy than 2007’s 14 percent growth. And China is making huge investments in Africa, changing the balance of power there. Whatever we think of China, we can’t ignore it.

The week ahead. Earnings season fired up last week, and we’re under the fat part of the bell curve now. Scores of companies will be reporting results every day. Otherwise, it will be a relatively slow week for economic reports. We’ll get a consumer confidence report tomorrow and a first quarter GDP report on Wednesday. Those reports do have the potential to move the markets. But most analysts are keeping an eye on earnings. If earnings continue to beat expectations, that will be a good sign for the rest of the year.

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