While the Dow Jones Industrial Average and the S&P 500 Index have been regularly notching record highs, the Nasdaq Composite made news last week,moving past the 4,000 markfor the first time in 13 years.
The last time the index was at these levels was September 2000, toward the end of the dot-com boom. In addition, broader market indices like the S&P 500 continue to post new record highs.
It’s no wonder, then, that some investors are again asking if stocks are in a bubble. In my view, as I write inmy new weekly commentary, theanswer remains “no.”
While valuations are less compelling than they were a year ago, equities still remain compelling alternatives to bonds and cash. Taking a closer look at the Nasdaq helps illustrate this point. The current trip above the 4,000 level looks quite different from what was happening in 2000 for two reasons:
1. Not frothy valuations. Froma valuation perspective, the Nasdaq today trades at around 24x trailing earnings. That’s not cheap, but it’s below the index’s 18-yearmedianof 30x trailing earnings and far below the 150x level the index touched the first time it crossed 4,000 in 1999.
2. A closer look at the technology sector. Thetechnology sectoris still a very heavy component of the Nasdaq, though less so today than 13 years ago, asMatt Krantz of USA TodayandBarry Ritholtz recently pointed out, and it doesn’t look expensive. The sector is currently trading at around 17x earnings—roughly in line with the broader market and much less than the 67x earnings we saw in 1999. In fact,it’s one of the sectors I currently like.
So, simply put, while some areas of the market are looking frothy (includingU.S. small-cap stocksand social media companies), today isn’t 1999 and we feel stocks aren’t in a broad market bubble.
Source: Weekly Commentary, Bloomberg
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