Andrew Hallam
30.03.2021

Are Stocks At An All-Time High? Not If You Measure Right
_

My 17-year old niece works part-time at a supermarket. She earns about $13 an hour. When I was her age, back in 1987, I worked at a different supermarket and earned $10.35 an hour.

On the surface, it looks like my niece makes more money per hour than I did. But that wouldn’t exactly be right. After all, the costs of goods and services are far higher today than they were 34 years ago. As such, you could have bought more groceries, put more gas in a car tank and acquired more movie tickets with $10.35 in 1987 than you could with $13 today. In fact, $10.35 was triple the minimum wage, so it was crazy income for a 17-year old kid.

My main point isn’t that I made more money than my niece. Instead, I want to explain that nominal income levels are relative…much like stock market levels. For example, when headlines read, “The Stock Market Hits An All-Time High Again,” it’s tempting to think stocks are more expensive than they have ever been before. But that isn’t true.

In fact, U.S. stocks are cheaper today than they were 19 years ago. You might believe I’ve lost my marbles, so let me explain. Stocks (like my niece’s hourly wage) shouldn’t be deemed high or low based on an absolute level. Instead, we should compare stock prices to their underlying business profits. For example, the trailing PE ratio for the S&P 500 was 38.63 times earnings on January 1, 2021. That’s high. But the S&P 500 was pricier on January 1, 2002. U.S. stocks traded at 46.17 times earnings. That’s why U.S. stocks were more expensive 19 years ago than they are today.

Taking a broader view, the table below shows PE ratios for the S&P 500 over two time periods: 1998-2003 and 2016-2021. Based on relative earnings, U.S. stocks were more expensive from 1998-2003 than they were from 2016-2021. Calculating PE ratios from January 1st each year, the S&P 500’s PE ratio averaged 31.9 times earnings from 1998-2003. In contrast, from 2016-2021, the S&P 500 averaged 25.64 times earnings.

PE Ratios
The Last Six Years Haven’t Seen The Highest Prices

^{*As of January 1 of each year
**Based on PE levels at the beginning of each year
Source: https://www.multpl.com/s-p-500-pe-ratio/table/by-year}

Critics might say, “During the late 90s dotcom boom, the S&P 500 was heavily weighted with high-priced technology stocks, so that temporarily inflated the overall market’s PE ratio.” While that might be true, technology stocks are also heavily priced today. Tesla, for example, is one of the biggest stocks in the S&P 500. It has a trailing PE ratio of almost 1000 times earnings. Amazon trades at about 75 times earnings. According to Siblis Research, the technology sector (at 27.61 percent of the S&P 500’s total weighting) is as heavily weighted in the market now as it was during the dotcom boom. And yet, the overall market is still cheaper today than it was 19 years ago.

We often forget that non-technology stocks were also expensive near the turn of the last century. In 1999, most of the companies in the Dow Jones Industrials were old-economy firms. The Dow included just five technology stocks (Intel Corp, IBM, Microsoft, SBC Communications and United Technologies Corp). Yet, those humdrum Dow Jones Industrials stocks hit a price-to-earnings ratio peak of about 30 times earnings in 2001. Many traded at nosebleed levels for several years.

Shares in the Dow stock Pfizer, for example, traded at more than 50 times earnings in 1998 and more than 45 times earnings in 2000. Today, Pfizer (one of our COVID-19 saviors) trades at about 20 times earnings.

Another Dow favorite, Coca Cola, traded higher than 40 times earnings from December 1997 to March 28, 2001. The beverage maker hit a whopping 96.83 times earnings on August 2, 2000. Coca-Cola’s stock price, in absolute terms, is higher today than it was 20 years ago. But at 28 times earnings, Coca-Cola’s shares are far cheaper now than they were from 1997-2001.

General Electric, another member of the Dow Jones Industrials, traded above 40 times earnings from late 1999 until early 2001. Its price peaked on August 28, 2000 when its PE ratio hit 49.08 times earnings. As I write this, GE trades at about 21 times earnings.

Robert Shiller’s CAPE ratio is an even stricter assessment of market levels than the price-to-earnings ratio. The CAPE ratio averages historical inflation-adjusted corporate earnings over the previous ten years and compares that to stock prices. On January 1, 2021, the S&P 500 had a CAPE ratio of about 34.40 times earnings. But that wasn’t an all-time high. In January 2000, the CAPE ratio for U.S. stocks was a scorching 43.77 times earnings.

CAPE Ratios
The Last Six Years Haven’t Seen The Highest Prices

^{*As of January 1 of each year
**Based on CAPE levels at the beginning of each year
Source: https://www.multpl.com/shiller-pe/table/by-year}

I’m not saying U.S. stocks are cheap…far from it. But they’re far cheaper now than they were 19 years ago.

I understand if you’re still worried about U.S. stocks, but take comfort from owning bonds and international shares as well. After all, if you measure stocks by CAPE ratios, international equities are half the price of U.S. shares.

Star Capital publishes CAPE ratios around the world every quarter. According to their latest report, Developed Market European stocks recorded a CAPE ratio of just 15.8 times earnings. The Emerging Markets had a CAPE ratio of 15.7 times earnings. U.S. stocks have only been that cheap twice in the last 30 years. They recorded a CAPE ratio of 15.17 times earnings in 2009 and 15.61 times earnings in 1991.

So, are stocks priced at an all-time high? From a global perspective (and your portfolio should be global) the correct answer is, “No, not even close.” Yet, even if they were at an all-time high, remember to stay the course. Maintain a diversified portfolio of low-cost index funds. Regularly add money if you have it and ignore the media’s noise. The financial media, after all, majors in fear, greed, and half-baked information.

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.