Is the market worse now than in 2000?

Today's average overvaluation may actually be higher than it was back then. There are fewer wacko bubble stocks and fewer good-value stocks.

By MSN Money Partner Aug 8, 2014 1:23PM
Credit: © Richard Drew/AP
Caption: Specialist Jay Woods is reflected in one of the screens at his post on the floor of the New York Stock Exchange, Wednesday, June 18, 2014By 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 (CSCO), 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, Microsoft (MSFT), Intel (INTC), Yahoo (YHOO), eBay (EBAY) and Amazon (AMZN), were in crazy bubble territory. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

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.

Back then my Daily Mail colleague in London, an acerbic Irishman named Brian O'Connor, memorably characterized the tech bubble as "5 percent of the economy pretending it was 50 percent," and he was right. But the other 95 percent 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 -- rom 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 percent today versus 0.8 percent 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.

More from MarketWatch

Aug 8, 2014 3:56PM
It's way worse than 2000. It's been pumped full of more hot air than the goodyear blimp. Get the government out of the stock market rigging business and the phony wealth creation business. Let asset prices fall to their real value based upon the amount a buyer who actually earned (worked and saved) the money would pay. Bankers with free money and an explicit bailout guarantee from the government don't care about what the real value is. 
Aug 8, 2014 3:00PM
The Fed Rate in 1998-1999 was around 5%. Today it's 0.25%. Most people (including MSN Money Partners apparently) don't know that interest rates have a direct effect on stock values. Lower yield demand equals higher prices. If equities prices weren't higher now it would be very unusual.
Aug 8, 2014 2:54PM
"Is the market worse now than in 2000?"

Yes, because the Debt and Leverage is far worse then in 2000 or any other time in World History. When the Debt Bubble explodes again, it might take DECADES to recover. Why, the Global Feds are already all in at $10Trillion and counting. Why, because eventually rising interest rates will be 800 pound Gorilla stopping everything in it's tracks. Rising rates with Debt Loads 40% higher then back in 2008. Yikes.

Aug 8, 2014 5:20PM

Just because the stock market is at an all time high, doesn't always mean it is a bubble.  In 2000 the tech stocks and the dot com stocks in particular were definitely a bubble.  However, the rest of the stock market was not a bubble, as the author decribes the valuations were lower on those than it is now. 


When the bubble burst and the dot coms got wiped out, the non-tech part of the market held up pretty well from march 2000 until sept 11 2001.


As the other poster said, part of the stock market valuation is a function of interest rates and if they did not have a higher PE with rock bottom rates, then there would be a worse problem.  Yes, the whole market would crash if the Fed pulled the plug abruptly on cheap money, but there is no reason they will raise rates abruptly.

Aug 8, 2014 3:19PM

 Is the "Market Worse Now Then In 2000"

Well Hell NO....

Aug 8, 2014 5:32PM
LOL.  Doomer talk never ends.    I've gotten rich ignoring it.
Aug 8, 2014 5:03PM
I can think of no logical reason to use median rather than average P/E.  Regardless, the current market is valued at only slightly above the 50 year average P/E.
Aug 8, 2014 4:50PM
what is going on in the stock market right now is absolutely illegal.  it is the equivalent of 'fixing' the super bowl
Aug 8, 2014 4:30PM
If you can see what happened today with this "increase" in the Dow today...explain it to me.  If this is not abject "churning" and "manipulation"  then what the heck is it?  The SEC allows this and does nothing, knowing.  The Ukraine situation has nothing to do with anything.  If you check out bricks and mortar corporate businesses...they are cutting back and closing stores.  Sure, they have all that capital on the sidelines....yeah right. 
Aug 8, 2014 6:50PM
The market is a joke, the federal reserve banking cartel is not going to let the stock market crash..and it's way worse than in 2000 gold was less than 300 an oz dollars back then silver was like 4/5 bucks this market has been pushed up by the FED since 2009 the Feds Balance sheet is almost 5 trillion it was 800 billion in 2009..they are the buyers of the stock market,.. what do you expect pumping 5 trillion in the market; of course it is going to go up to all time highs.
Aug 8, 2014 2:45PM
Guess, they are monitoring respondents.  Now ... why is that?  Just posted a comment in response to the "guru" and it disappeared.  What a phony crock of crap this site has become!
Aug 9, 2014 9:27PM
Wars on multiple fronts while the homeland is under huge duress and unrest with too much fake money bolstering dead companies and corrupt wealth. The Treasury is bankrupt.
READ your history... that's EXACTLY what led to the French Revolution. 
Aug 8, 2014 7:02PM
Fake stock markets UP today on "hopes" of a Russian pull-back in the Ukraine, but nobody says a word as we bomb the crap out of Iraq and the Gaza truce ends with missiles fired. 
War is Hell... we have an over-supply of Lawyers, Financiers, Accountants, Career Politicians and Executive Administrative Management and Board Directors... these are the folks who need to get dropped on these hot spots first. We can use Chinese weapons and armor. I'm sure Haliburton and Bechtel are up to it. We'll even throw in a bunch of pledging GOP in Congress to really get the job done. 
Aug 9, 2014 11:29PM
As my father use to say, 'it is what it is'.   The manipulation due to the fed's unprecedented printing of money, as a result of failed economic policies, has caused interest rates to remain at historic lows for the longest period of time ever, creating a perfect storm for stocks.  Corporations are smarter than ever by hoarding cash, buying back stock resulting in an increase in EPS and reducing and consolidating operations to operate extremely efficiently.  This has created an unprecedented opportunity to make a tremendous amount of money in the stock market  if invested correctly.  The tide will turn.  However, corporations will be better able to withstand a market correction as interest rates increase due to operating more efficiently.  There are many contradicting indicators due to the unevenness of the recovery.  The underemployment rate will remain at historical lows as seniors remain longer in the work force due to the new realities, graduates take jobs for the most part way below their education level and those individuals who try to get a job after not working for long periods of time finally give up.   It's a new reality.....for better or worse.
Aug 10, 2014 1:07PM
There is only a dollar bubble. With those printing presses running at full bore it has to pile up somewhere.
Aug 8, 2014 2:49PM
"But everything else on the stock market was relatively normal. Indeed, "value" and "old economy" stocks, especially smaller value stocks, were cheap."

Funny how these Wall Street Guru types are just now figuring this out now. They always focus on the Hype, not the Reality.

"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."

Well the first book I ever read about invest was by Peter. Great read. However, that hardly makes him right about everything. He isn't. I famously heard he Retired once the Markets didn't behave as he expected. Go figure.

Aug 9, 2014 12:13PM
There is no value, just Fed meddling.
Aug 8, 2014 11:44PM
too many people talk about a drop in the market and it could be a self-fulfilling prophecy. On the other hand I don't hear everyone including the janitor talking about how much they are making on their investments like the last 2 crash's in the market I have been through. I think we are in for a slow steady climb in the market and the wait and see what happens attitude  people who got hurt in the last recession realized they missed the biggest recovery of all time and try to get in it will be too late.
When I hear everyone talking about the new wave of companies in Solar power and electric cars and the new companies making 3D print systems and how they own stock and are making a bundle on their investments then I am out of here.

Aug 11, 2014 12:20PM

We could trade the value of all stocks in the USA and use the money to REDUCE our debt.   The value of the entire stock market is near what we owe.  Maybe we can be debt free or have only a small about of debt?

Nah, the democrats will just dig us deeper in the hole and leave us broke...

Aug 11, 2014 6:30AM
Today's Markets carries far more Risk then at any other time in World History. Stating that is far different then saying whether or not the Markets will rise or fall. Most of us have seen stocks rise far longer then thought possible over the decades and do the same on the Downside. Opportunities arise on the downside and the upside. All depends on how you play this game.

I have been stating like forever that you can't short this Crack-Dollar fueled Market. We are in a secular Debt Driven Bull Market. Manipulated interest via the Global Feds printing well over $10Trillion and counting. Our own FEDS approaching the $5Trillion Dollar Mark. That is debt until the Fed actually unloads it. As of now, they have ZERO plans of ever doing that. In fact, it's highly likely they can ever unload it. That means they will have to Monetize it. That means it becomes actually debt.

Bottom-line is this, with the Global Fed's actions, Market to Fantasy of Bad Bank Debt wouldn't hold water. That's why the Fed is giving Banks Credit on the Books for Debt that isn't worth the Paper it's written on. We have over $700Trillion in Counter Party Global Derivative Risks. That's the 800 pound Gorilla that never left the room. Eventually that along with other issues will DOOM the longer term viability of the Stock Markets. Buy and hold to infinity died the Day the Global Feds went Insane. Until we solve our massive Global Debt issues, that won't change anytime soon.

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