When the NASDAQ Composite Index hit 5000 in March of 2000, jubilant investors celebrated the milestone. Shortly thereafter, however, scores of individuals lost their collective shirts. Many witnessed losses of 50%, 60% or 80% of their account values on names like Cisco, JDS Uniphase and Pets.com.
Back then, the euphoria was akin to unchecked greed. Today, the public is far more subdued. And that’s a positive sign. After all, how could we be in a “stock bubble” if we are merely revisiting the place where it all began?
(Note: Actually, we have only revisited a nominal (price-weighted) starting gate. The NASDAQ would need to rise above 7000 on an inflation-adjusted basis for the dollars to mean the same thing.)
So no, this is not the manic Willy Wonka-like balloon ride that characterized the start of the 21st century. That said, there are valid measures of value that suggest things are every bit as overpriced in March of 2015 as they were in the dot-com era. For example, the current median price/earnings (P/E) and current price/revenue (P/S) for all U.S. listed stocks is higher than in 1929, 1973, 1987, 2000 and 2007. The highest median stock P/E and P/S price tags in recorded history? Unfortunately, yes.
Surely, stock prices cannot be as insane as they were 15 years ago, can they be? Maybe not for the NASDAQ. Back in March of 2000, the index had a 64% weighting in tech stocks, mostly Internet names. Today, the index is broader. It has a much greater allocation to health care corporations that actually earn profits. What’s more, today’s NASDAQ has a 10% weighting in Apple.
My, how quickly they forget. The last time that you were able to find a negative word about Apple’s future was in the summer of 2012. Many articles about soon-to-be retirees with 100% of their retirement in Apple stock commended those investors for the foresight to bypass “over-rated” diversification. And then the roof caved in.
Similarly, the complacency about risk in stocks has been reaching extremes. For instance, the Investors Intelligence Advisory Sentiment Survey is one of the premier contrarian indicators. The most recent reading of bullishness and bearishness? Bullish optimism hit a remarkably high level of 60%, while bearish pessimism hit a startling low of 14%.That’s one of the most off-kilter sentiment extremes since the survey first started.
Overpriced markets come in many disguises. March 2000’s NASDAQ witnessed irrational exuberance in the form of the Internet’s creation of a “New Economy.” Today’s illogical rationale centers on ultra-low interest rates – zero percent, even negative percentage rates – that absolutely, positively, “must” push real estate and stock prices higher.