Monday, June 4, 2007

How Expensive is the Market?

From Bloomberg:

Companies in the Standard & Poor's 500 Index may still be a bargain after the benchmark for U.S. equities surpassed its 2000 record.

The index's 500 members are 45 percent less expensive relative to historical profits than when the index last peaked, and 30 percent cheaper than when it fell to a decade low in October 2002. Price-to-earnings ratios declined after companies reported 14 straight quarters of 10 percent-plus profit growth, the longest streak since 1950.

The S&P 500 rose 0.8 percent to 1530.23 yesterday, eclipsing its previous high of 1527.46 set March 24, 2000, led by Exxon Mobil Corp., Goldman Sachs Group Inc. and Apple Inc. The gauge, whose members have a median market value of $14 billion, rallied 7.9 percent this year after first-quarter earnings climbed three times more than analysts' estimates.

``The market is definitely much more fairly priced than it was back in 2000,'' said Michael Mullaney, who helps manage $10 billion at Fiduciary Trust Co. in Boston. ``It's on a much more solid fundamental footing -- we're in pretty good standing for at least the remaining part of the year.''

I think a comparison to 2000 level valuations is a poor choice, as the market was extremely overvalued by that time. However, I think the article makes a good basic point. Stocks aren't cheap, but they're also not expensive.