Wednesday, June 18, 2003

More news on silly stuff like price-to-earnings ratios and other stuff that doesn't matter now that the "new economy" is back again on Wall Street:
For certain, the Dow is much less expensive than when it peaked out in early 2000. Back then, its price-to-earnings ratio was around 27. Now, it's around 18. What's more, with the intense focus on company bookkeeping that's developed over the past year, the quality of Dow company earnings is much higher than during the bubble years.

That doesn't mean it's cheap, however. Through much of the 1990s, the Dow 30 carried a lower P/E than now and before the 1990s the Dow's valuation tended to be much lower. A decade ago the Dow carried a dividend yield of around 3 percent -- low by historic standards. Now its dividend yield is 2.1 percent.

Moreover, looking beyond the Dow, stock valuations overall are rich. The S&P 500's PE is back over 20. And the tech-filled Nasdaq 100's PE is pushing 50. When investors see the Dow approach the 10,000 mark, they may take a hard look at the market and decide that it's become too expensive again. And take it as an opportunity to get down off the mountain.


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