The U.S. stock market has been surprisingly resilient in recent months despite signs that the U.S. economy is slowing. Behind the lofty broad market averages, however, disagreements are intensifying about the value of individual stocks, an indication that the overall outlook is increasingly uncertain.
Friday’s jobs report was just the latest in a series of recently shaky economic numbers. Employers added 75,000 workers in May, well below estimates, bringing the four-month average to just 105,000 new jobs a month since February. The Institute for Supply Management’s manufacturing index dropped to 52.1 in May from its recent high of 60.8 in August. Inflation is struggling to reach the Federal Reserve’s target of 2% a year. And those numbers don’t yet fully reflect the negative impact of the U.S.’s deepening trade dispute with China, never mind the White House’s threatened tariffs on other trading partners.
The bond market is clearly concerned. The yield on 10-year Treasuries has tumbled to 2.1% from 3.2% in November. Perhaps more noteworthy, the spread between the yield on 10-year and three-month Treasuries is a negative 0.2%, the deepest inversion since the run-up to the 2008 financial crisis.
The stock market, on the other hand, shows few signs of stress. The S&P 500 Index is hanging around its all-time high. The CBOE Volatility Index, or VIX, which measures expected volatility for the S&P 500 over the next 30 days, is up modestly in recent weeks but nowhere near the levels notched in December or in previous bouts of anxiety. And analysts’ price target for the S&P 500 is a hopeful 3,183.88 as of Friday, or 10% higher than the index’s current price.
Look closer, however, and cracks begin to appear. Analysts rarely agree on how stocks should be priced, but the degree of disagreement varies considerably over time. As the outlook becomes murkier, the disagreements escalate.
One way to measure the level of those disagreements is by comparing analysts’ high and low price targets for individual stocks. I looked at the price targets for each stock in the Russell 1000 Index over the last 15 years, the longest period for which numbers are available. In 2004, the economy was well into its recovery from the dot-com bust a few years earlier. The median premium, or the percentage by which the top price target was higher than the bottom, was 21%.
But as the recovery matured in subsequent years and the economic outlook became cloudier, the differences between those high and low price targets widened. By 2008, the median premium nearly doubled to 36%, and as the economy struggled to recover from the financial crisis in 2009, the median premium spiked to 53%.
When the crisis eased, so did the disagreements. The median premium fell to 33% in 2010 and hung around that level through 2017. That began to change last year, however. The median premium rose to 38% in 2018 and is now 44%, the highest reading since 2009.
The disagreement over the value of Tesla Inc.’s stock is probably best known, but Tesla is far from the only controversy. Tesla’s high price target is $530 a share and the low is $54, according to Bloomberg data, which is a whopping premium of 881%. And yet it ranks just 19th among the highest premiums in the Russell 1000.
The 18 stocks that precede Tesla represent seven industries and include names such as Cboe Global Markets Inc., with a premium 1,176%, WW Grainger Inc., with a premium of 1,950%, Alleghany Corp., with a premium of 3,082%, and the reigning champion O’Reilly Automotive Inc., with a premium of 6,614%.
None of this means that the market is poised for a fall. But it does mean that the outlook for U.S. stocks is more uncertain than it has been for many years, and that the broad market averages are not as sure-footed as they appear.
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Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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