We are In a Market Whose Present Valuation is Twice as High as it Was Back in 2000, Should We Be Worried?


Many things have changed since the stock market crash of 2000.  We have seen Apple Inc (AAPL 207,23 -1,84 -0,88%) go from being just another computer brand to the most valuable company in the world.

While we watch Amazon.com Inc (AMZN 1.864,27 +16,52 +0,89%) who went from a simple e-book company, to one of the biggest worldwide online retailers and Tesla’s (TSLA 373,15 -6,42 -1,69%) CEO, Elon Musk, rise from relative obscurity to Twitter stardom and market gold.

However, there are some things that never change and Doug Ramsey, chief investment officer at Leuthold Group, has been on a mission of sorts to show the parallels between 2000’s market and 2018’s.

It seems there are multiple similarities one being elevated valuation of the S&P 500 then and now.

“Recall that the initial visit to presentlevels was followed by the S&P 500’s first-ever negativetotal return decade,” he stated in a recent blog post.

A measure of a stock’s actual value is its price-to-sales ratio.  The price-to-sales ratio isn’t as popular a gauge as the price-to-earnings ratio, or P/E, but still is is seen as far averse to manipulation as it is based solely on revenue.

Doug Ramsey also has concerns that when looking at the median price-to-sales ratio of the S&P 500, it is twice as expensive than it was back in 2000.

“Overvaluation in 2000 was highly concentrated; today it is pervasive, withthe median S&P 500 Price/Sales ratio of 2.63 times more than double the 1.23 times prevailing in February 2000.”

In his next follow up post he continued to reiterate that 2018 is looking increasingly like 2000 did.

“The statistical similarities between the two bulls are on the rise, and the wondermet surrounding the diruptive techonlogy of today’s market leaders seems to have sweled to maybe 1998ish levels,” he wrote.

He is issuing a warning that the upward trajectory of the of the market is not sustainable.  However, Ramsey also admits that history hasn’t always been the best predictor of the future, but still the S&P 500’s performance, after hitting its peak on Jan 26th, is closely paralleling what happened 18 years ago.

“In the earlier case, a volatile five-month upswing that began in mid-April ultimately fell just a half-percent short  of the March 24th high by early September.  This year, a similarly choppy, six-month rebound has taken the S&P 500 to within 1% of its January 26th high,” Ramsey said.

Other resemblances to the 2000 market crash are healthy breadth as denoted by the uptrend in the daily NYSE Advance/Decline Line while corporate profits, measured by Leuthold’s internal earnings indicator, are extremely robust.

However, even if 2018 wasn’t mirroring 2000, the continuous trade tensions between the US and its trading partners, in the absolute worst case scenario, could savagely disrupt global trade and still looms as a huge threat to stocks.  Even though investors are ignoring is as the better than expected earnings results keep on rolling in.

China is expected to levy tariffs on$60 billion of U.S. goods if the Trump administration moves forward with its plan to increase the tariffs on Chinese goods to 25% on$16 billion of Chinese imports.

August 22nd will officially mark the longest bull run held by the market in history.  Guess who the previous titleholder of that record was….the decade-long bull market prior to the tech bubbles burst in 2000.

On Thursday, the market rose with the S&P 500 SPX, -0.01% adnthe Dow Jones Industrial Average DJIA, -0.13% which was up fractionally while the tech heavy Nasdaq Composite COMP, +0.28% gained 0.3%.

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