As Dow Nears 17,000 It’s Macarena Time on Bubble CalendarMichael P. Regan
Check your calendar, because this is a good week to pencil in some time to wring your hands, furrow your brow, clutch your pearls or do whatever it is you do to express concern the rally in equities may have gone too far.
The Dow Jones Industrial Average is less than 50 points from 17,000 and the Standard & Poor’s 500 Index is closing in on 2,000. Both of those are unprecedented levels that offer milestones to reflect upon the five-year rally in stocks and question your resolve -- is this a healthy bull market or a bubble puffed up by an over-reaching Federal Reserve?
Leuthold Group LLC has a clever way of sizing up this market and comparing it to the great dot-com bubble of the 1990s. Doug Ramsey, the firm’s chief investment officer, even assigns a date in the turn-of-the-century rally that corresponds to the current valuations of the market.
So where exactly are we now on the dot-com bubble calendar? Here are a few hints: It’s so early in Bill Clinton’s presidency that Ken Starr is not a household name, Paramount Pictures is preparing to release the cinematic classic “Beavis and Butt-Head Do America,” and mom-dance history is being made as “Macarena” heads to the top of the music charts.
To be exact, the date is Sept. 6, 1996, by Ramsey’s math.
To place the current market on the dot-com bubble calendar, Ramsey looked at the average of six valuation metrics, including ratios of price to earnings, sales, cash flow and book value as well as dividend yields. He used the S&P 500 and an S&P index of industrial stocks. The original study was published in March and Ramsey updated the numbers yesterday upon request.
“We were surprised with the initial outcome of this work, thinking that valuations were probably more comparable to some time in 1997 or even early 1998,” he wrote in an e-mail yesterday.
The market lands furthest out on the dot-com calendar on an estimated price-to-sales basis, where it’s as expensive as it was in February 1998, according to Ramsey. Based on the ratio of price to normalized earnings per share, the S&P 500 lands at February 1995 on the bubble chart.
The dot-com rally kept going until 2000. The Dow peaked first at 11,722.98 on Jan. 14 of that year, then slid 38 percent to its low on Oct. 9, 2002. The S&P 500 peaked on March 24, 2000 before a 49 percent plunge to its low in October 2002.
Both had rallied about 200 percent in the five years before the peak, compared with a 104 percent gain for the Dow and 119 percent advance in the S&P 500 for the five years before today. (Or, if you start at the bottom of the bear market in March 2009, a 159 percent gain for the Dow and 190 percent gain for the S&P 500.)
Keep in mind that time is not a variable in Leuthold’s equation. The market’s current corresponding date is only two weeks past the date published in the original study in March.
And that’s probably a good thing. Because no one ever wants the “Macarena” to end.