The Biggest Stock Bubble Ever: Median PE Multiples Are Now Higher Than 2000

By Brett Arends, MarketWatch

You know how I reported that this is now the third biggest stock market bubble in U.S. history?

I was wrong.

By one way of looking at it, it isn’t the third biggest bubble at all.

It may be the biggest.

Yes, really. Bigger even than 1999-2000 - the daddy bear of all stock-market bubbles.


That’s because the average overvaluation today may actually be higher than it was back then. There are fewer wacko bubble stocks - but there are also far fewer good-value stocks.

We tend to think of 1999 as the off-the-charts nuttiness classic of all time, the “Caddyshack” of stock-market wackiness. And when you look only at the big picture, that’s right.

For example, when you look at the total value of the stock market compared to gross domestic product, or the total value of stocks compared to cyclically adjusted earnings, or the total value of stocks compared to the cost of rebuilding every company from scratch (a measure known as the Tobin’s q), then 1999 remains the grand champ. We remain well below those levels today.

Alas, there’s a caveat.

That big picture in 1999-2000 was thrown out of proportion by a relatively small number of psycho stocks - like Cisco Systems /quotes/zigman/20039/delayed/quotes/nls/csco CSCO -0.28%  , a jumbo cap which traded at a ridiculous 150 times forecast earnings (the historic average for stocks is about 14 times). Large-cap growth stocks, such as Cisco, and Microsoft /quotes/zigman/20493/delayed/quotes/nls/msft MSFT +0.16%  , and Intel /quotes/zigman/20392/delayed/quotes/nls/intc INTC -0.12%  , and Yahoo /quotes/zigman/59898/delayed/quotes/nls/yhoo YHOO +0.11%   and eBay /quotes/zigman/76117/delayed/quotes/nls/ebay EBAY +0.50%   and Amazon /quotes/zigman/63011/delayed/quotes/nls/amzn AMZN +0.18%   were in crazy bubble territory.

But everything else on the stock market was relatively normal. Indeed “value” and “old economy” stocks, especially smaller value stocks, were cheap. I remember buying stock in clothing retailer Joseph A. Banks, then a small company, in the summer of 2000 when it was about five times earnings.

Can I afford to retire at age 62?

Financial adviser Tom Henske weighs in on the financial steps folks may need to take in order to retire at age 62.

Back then my Daily Mail colleague in London, an acerbic Irishman named Brian O’Connor, memorably characterized the tech bubble as “5% of the economy pretending it was 50%,” and he was right. But the other 95% of the economy was actually pretty cheap. So long as you avoided tech, you were actually OK.

Not any more.

To get the details I asked my data guru in Switzerland — Joachim Klement at Wellershoff & Partners — for an analysis not of stock market “means” but “medians.”

People who know the difference can skip the next two paragraphs.

For the rest, let me briefly explain. The “mean” is what we usually think of when we think of the “average.” You add up the totals and divide by the number. So 10 people on Skid Row plus Bill Gates have a “mean” or “average” net worth of $7 billion. They have zero billions, he has $80 billion, and when you add them all up and divide by eleven you get $7 billion apiece. You can see the problem.

But the “median” is often a better measure. To get the median you line everybody up in a row - from the tallest to the shortest, the richest to the poorest, or whatever - and then pick the guy slap bang in the middle. Bill Gates and ten people on Skid Row have a “median” net worth of $0 billion. Yes, there are issues both ways. But the median treats Gates, correctly, as an outlier.

Klement looked at the top 1500 stocks by market value. What did he find?

When you look at medians, or in other words the typical stock, valuations are higher today than they were at the peak in 1999-2000.

For example, the median stock today is 20 times earnings. In January 2000, it was 16 times.

The median stock today trades at 2.5 times “book” or net asset value. At the start of 2000 it was just 2.2 times.

The median stock today trades for 1.8 times annual per-share revenues. In 2000: just 1.4 times.

Only on dividend yields (1.3% today versus 0.8% back then) are we better off.

There are some caveats. Each individual measure is subject to a lot of variability and noise. Price-to-earnings ratios, for example, can seem artificially high in a slump because profits are depressed (and can seem artificially low in a boom because profits are temporarily elevated). According to Klement’s data, median p/e ratios were actually higher than today at certain points in the past, such as in 2002. For that matter, price-to-book ratios were briefly higher than today back in the later 1990s. So no individual measure can tell the whole story.

Furthermore, there are some constraints with the dataset. Klement looked at the top 1,500 companies on the market and then traced the valuation backwards for each one. However, that analysis suffers from what’s called “survivorship” bias. Stocks which dropped out of the index don’t show up. That will skew the results.

Overall, we should beware trying to force too much precision from general data.

Nonetheless based on the medians, rather than mere means, today’s stock market valuation seems at the very least to be in a similar ballpark to 1999-2000.

Does this mean the stock market is inevitably going to “crash”? Of course not. I have absolutely no idea if the market is going to crash, or, if so, when. I remember Peter Lynch’s famous dictum, that investors have lost far more money over the years fearing a crash than they have ever lost in an actual crash.

But it does mean that, if history and mathematics are any guides, the long-term returns on stocks from today are probably going to be mediocre.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access