With stocks at all-time highs, investors can’t help but consider what happened that last two times we saw peaks.
Sure, the highs of 2000 and 2007 were followed by crashes.
But while the nominal prices may be similar, the fundamentals are very different.
“Anyone can find similarities in the stock market action of different years,” writes Reformed Broker Josh Brown. “It’s not complicated – stocks can really only do some combination of three things, up, down or sideways.
“But this type of comparative analysis is, as always, a function of what details you choose to leave out. I can compare my house to the Taj Mahal if I choose to leave out quantitative factors like square footage or qualitative factors like its location or historical significance.”
One key difference Brown points to is valuation as measured by the ratio of price to earnings (P/E).
“Here’s a very rudimentary but essential thing to be aware of – in 1999 the S&P finished at 1469, earned 53 bucks per share, and paid out $16 in dividends,” writes Brown. “These are nominal figures, not adjusted for inflation. The 2013 S&P 500 is earning double that amount – over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.”
Oppenheimer’s John Stoltzfus provided this handy chart this week overlaying the S&P 500 with it’s P/E ratio. It also addresses inflation.
You come away with three conclusions: 1) the valuation (P/E) is much more reasonable today than during the last two highs, 2) nominal and adjusted earnings are much higher today, and 3) the inflation-adjusted price of the stock market is around 20% lower today than in 2000.
So while the nominal price might seem scary, everything else about the stock market today is much more reasonable.