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Pastimes : All Clowns Must Be Destroyed -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (33136)	5/16/2000 10:48:00 AM
From: RocketMan	Read Replies (1) \| Respond to of 42523

Heinz, an important question relative to today's historically high p/e ratios is whether this is indicative of a market-wide bubble, or is partly an artifact of what is being measured. As you say, the non-cap weighted VGY has been in a bear market since 4/98, while the market cap weighted indexes have gone off the charts. The growth of 401k's and the popularity of index funds is part of the reason for this bifurcated market. There is no question that there are bubbles in several sectors of the market. Relative to the future, however, the question is whether these bubbles will deflate (as they have been doing) and the money flow into the remainder of the market, or whether the entire market must come down. If the former, we could be in for a much healthier and continuing bull market for the next several years. If the latter, the ride down could be so severe that the market could take the rest of this decade or more to recover. I wish I had the statistics to look at this in more detail. The S&P 500's p/e is in the upper 30's, I believe, but if you take out the richest caps (the techs)with 80+ p/e's, the remaining S&P is down to normal p/e's of the mid-teens. Suppose the highest stocks came down another 40-50% (many are already down that much), and the money flowed into the lower half, or into small caps. Would we still have an over-valued market? I realize there is a lot of psychology at play here as well, if the market came down that much the money might flow into bonds or cash rather than stocks, but eventually I would think it would come back to the market. This analysis is important before one can determine whether the overall market is truly over-valued or just out of balance. In fact, if we are out of balance, it's possible we could remain in this condition for a long time, while large caps grew their earnings to at least a good portion of their valuation. Maybe the nifty 50 situation is more akin to today's market than 1929, with the high flyers taking a beating while the rest of the market plods along. You have a lot of figures and charts, can you shed light on these questions?