Nov. 25, 2013, 4:09 p.m. EST
Putting Nasdaq 4,000 in perspective
Commentary: How today compares to when Nasdaq first traded at 4,000
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By Mark Hulbert, MarketWatch
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CHAPEL HILL, N.C. (MarketWatch) — The stock market may very well be overvalued right now.
Indeed, with the Nasdaq Composite Index COMP +0.37% finally trading above the 4,000 level this week, the first time in 13 years, comparisons to the Internet bubble are perhaps unavoidable.
COMP 4,009.17, +14.59, +0.37%
6,000
4,000
2,000
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91
94
97
00
03
06
09
12
Nevertheless, a sober assessment of the data shows that the market today is well less overheated than it was in December 1999, the first time this index traded above 4,000. In other words, whatever else you say about what’s happened over the last 13 years, at least some of the overvaluation that prevailed at the top of the Internet bubble has been worked off.
Consider the data in the accompanying table, which focuses on several popular valuation metrics. I think you will agree that whatever else you think about the market’s current valuation, the situation today is far different than what prevailed in late 1999. (The data in the table reflect the overall stock market, as represented by the S&P 500 index SPX +0.11% .)
| December 1999 | Today | |
| P/E ratio (based on trailing earnings) | 29.7 | 19.1 |
| Cycllically Adjusted P/E ratio (the so-called “Shiller P/E” | 44.2 | 24.4 |
| Price/Book Ratio | 5.1 | 2.6 |
| Price/Sales Ratio | 2.4 | 1.6 |
To be sure, the bulls should not make too much of the table’s comparisons, since the market in late 1999 was at one of its most overvalued states in U.S. stock market history. So it’s faint praise indeed to conclude that we’re not as overheated now as then.
My point instead is that, to make the argument that we’re overvalued today, we need to do something other than compare where we are today to what prevailed when the Nasdaq Composite first traded at the 4,000 level.
I reached a similar conclusion two weeks ago, when I focused one of my columns on five different sentiment measures.
So, please, let’s stop the comparisons to the Internet bubble.
