I can remember sitting in my cubicle during my Vanguard days when the Nasdaq hit 5000 for the first time. That was 15 years ago, and it feels like it was yesterday; time flies when you’re having fun I guess. I also remember telling my clients to sell their highflying tech stocks to buy boring bonds; they thought I was crazy. Back then it made so much sense. Stocks were incredibly expensive and bonds were cheap, and yielding over 6%. The PE ratio on the Nasdaq back then was over 100X earnings! Talk about irrational exuberance. By the way, stocks got crushed for the next 2 and half years while bonds rallied.
Currently the PE ratio of the Nasdaq is in the high teens, possibly slightly overvalued, but nowhere near what it was in March of 2000. Also, back then you could have purchased bonds with handsome yields, and cash was paying over 5%. Today you can put your money in cash at 0% or buy expensive bonds yielding 2%.
Here are a couple of fun comparisons:
- Microsoft PE ratio currently 15, back in 2000 it was trading at 78 times earnings!
- Oracle PE ratio currently 14, back in 2000 it was trading at 120 times earnings!
Bottom line: Stocks, especially technology stocks are no where near the lofty valuations of 2000. By no means are U.S. equities a steal at these levels, but relative to cash and bonds, they represent the best house in a bad neighborhood.
Richard Siegel, CFP®
Managing Partner, ARQ Wealth Advisors, LLC