“Should you buy the stock market here, near all-time highs?” I asked a new young employee…
“Uh, no,” he answered.
“Why not?” I said.
“Because it’s at a record high,” he replied. “I mean, how much higher can it go?”
[ad#Google Adsense 336×280-IA]I think his simple answer is what 99% of Americans would say.
Too bad it’s wrong – at least today…
It wasn’t wrong before…
You see, stocks hit a record high in 2000, not too far from today’s levels, and then they crashed.
The same thing happened in 2007.
Today, we’re approaching record highs in stocks again…
What makes today different from 2000 or 2007?
There is one huge difference between now and then. It’s VALUE.
Stocks were expensive then… They are cheap today.
In 2000, stocks were ridiculously expensive… We were in the midst of the dot-com bubble. And stocks were the most expensive they’d been in recorded history. Specifically, stocks traded at a price-to-earnings ratio of near 30 – an unheard-of level in over 100 years of stock-market history.
In 2007, stocks had gotten expensive again… They were trading up to a price-to-earnings ratio above 20. Based on 150 years of history, stocks have had a tough time moving higher when they get that expensive… For example, the Great Crash of 1929 happened just after stocks got over a price-to-earnings ratio of 20.
But today is a different story… stocks are cheap. Here are my numbers from Bloomberg today:
Stocks are a better “relative” value today, too…
You see, interest rates are much lower today than they were in either 2000 or 2007…
In 2000, long-term government interest rates were around 6%. With interest rates that high, investors could easily choose to move money out of stocks and into bonds. In 2007, interest rates were around 4.5%. Once again, people could make a choice to get out of stocks and into bonds.
But today, interest rates are so low, who wants a bond? Stocks are the only paper asset worth buying right now.
Sure, stocks are near new highs. But don’t let that scare you…
Don’t worry about highs… worry about value for your money.
Today is much different than it was in 2000 and 2007. Stocks are a great value today. There’s hardly a better financial asset you can buy… regardless of the fact that we’re near new highs.
There are plenty of things in life and money to stress about… but a potential new high in the stock market today is not one of those things. Got it?