Tags: Nasdaq | PE | valuation | 2000

Nasdaq Sets New Highs, But This Time Is Different Than 2000

By    |   Wednesday, 29 April 2015 08:27 AM

New highs are one of the things investors seem to dread the most. It's certainly that true bear markets sometimes start after prices reach new all-time highs. But it's also true bull markets are usually nothing more than a long-running series of new all-time highs.

Last week, the Nasdaq Composite Index reached a new all-time high for the first time since the Internet bubble days of early 2000.

I was taught by an old trader that the four most expensive words in the English language are "it's different this time." He believed it was never different because markets tend to repeat history. It could be dangerous and expensive to ignore history.

But this time, it really is different.

Although prices are at all-time highs, valuations are not. Valuations are high but reasonable. Price-earnings (P/E) ratios are often used to define value. The P/E ratio of the Nasdaq Composite is 30, according to Bloomberg. At the 2000 price peak, the P/E ratio topped 500.

Because the P/E ratio reached such a ridiculous extreme in 2000, it's not possible to define what an average value should be. This demonstrates one of the problems with P/E ratios in general. Because earnings require a number of assumptions, the P/E ratio tends to be more volatile than do other valuation tools.

The price-book (P/B) ratio is usually a better valuation tool. Book value is less volatile than earnings are. There are still a number of accounting assumptions required to define the book value, but the stability of the P/B ratio makes it a more useful tool than the P/E ratio is. Bloomberg shows the P/B ratio of the Nasdaq index is 3.9, about 20 percent above the long-term average of 3.2. The peak in this indicator was 6.7 in 2000.

The price-sales (P/S) ratio, at 2.4, is also about 20 percent above its long-term average of 2. This is another stable ratio. It's confirming that valuation is high but reasonable.

Fundamental ratios are well below their 2000 peaks and that fact indicates this time is nothing like the Internet bubble. The Nasdaq Composite is slightly overvalued, but there is additional room for upside in the current market.

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MichaelCarr
New highs are one of the things investors seem to dread the most. It's certainly that true bear markets sometimes start after prices reach new all-time highs. But it's also true bull markets are usually nothing more than a long-running series of new all-time highs.
Nasdaq, PE, valuation, 2000
362
2015-27-29
Wednesday, 29 April 2015 08:27 AM
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