Today’s stock market is drawing a lot of comparisons to the dot-com bubble popping at the turn of the century. Some similarities exist between today’s elevated Nasdaq-earnings multiple and the events causing the bubble to pop.
Regardless, these two time periods should not be considered synonymous. Here we will explore the similarities and the more apparent differences of the year 2000 vs. today.
What’s somewhat similar
From the years 1999-2001, stock-split occurrences doubled in frequency. Today, while we do not have the quantity of splits we did at the turn of the century, high-profile companies like Apple and Tesla are making the same split decision.
Fortunately, this round of splits has a more comfortable backdrop. Fractional shares offered today (not offered in 2000) create the same affordability share splits try to foster. This service is now widely available across brokerages and should hopefully dim some of the demand for newly split shares. Additionally, resources — like The Motley Fool — are much more accessible to explain the dangers of treating stock splits like a bullish event, which they absolutely aren’t.
Beyond stock splits, the Nasdaq-earnings multiple is also elevated just like it was in 2000. When quantifying how historically elevated it truly is today, however, the differences between 2000 and 2020 begin to become more apparent.
While the Nasdaq’s current earnings multiple of 22 is undeniably, comparatively elevated, it does not begin to compare to the 189 times earnings the Nasdaq fetched at the peak of the dot-com boom. From a price-to-book perspective, the Nasdaq’s current 3.6 book multiple also compares favorably to its 4.8 book multiple in 2000.
Furthermore, monetary policy between the two time frames could not be more different. Today, the Federal Reserve’s mandate is full employment first and stable inflation second. In 2000 these two objectives were equally weighted.
With a larger focus on boosting employment, the Federal Reserve is in full monetary-easing mode. To help realize the elusive primary goal of full employment, its benchmark federal-funds rate sits below 1% vs. over 6% in 2000. Federal Reserve Chairman Jerome Powell, in the last Fed meeting, even went as far as saying rates will not be raised for at least three years.
Interest rates serve as direct competition for purchasing equities: A lower rate makes stocks incrementally more appealing to own. Knowing this, a 1% federal-funds rate vs. 6% in 2000 is very bullish for equity valuations.
The federal government has been just as friendly this year, sending out checks to families and covering business payrolls in response to the generational pandemic we are enduring.
Speaking of COVID-19, the pandemic undeniably created a daunting demand shock. While it has been scary, it also should be temporary, with Pfizer and Moderna CEOs expecting vaccine results next month and 130+ other candidates in trial. Dr. Fauci still refers to vaccine distribution as a 2021 event, and that would be a powerful earnings tailwind for a large chunk of the companies in the index.
2000 vs. today
While some are drawing real similarities between 2000 and today’s stock market, I think the differences are far clearer. A combination of coordinated monetary and fiscal stimulus, plus demand that should slowly recover, makes a 22 times NASDAQ-earnings multiple not so crazy. Maybe today is not so similar to 2000 after all.