The media has been making much of the stock market recently hitting “new highs” and then doing so again and again. What does not make the headlines is whether the increase from the prior high is one point, or one hundred points, but only that it is a “new high”. Sometimes, this can be misleading to casual observers of the investing environment, signaling investor interest to a degree that may not exist.
This can then lead certain investors to conclude that stocks are just “too high” to warrant further investment. Of course, this makes no more sense than a suggestion that a car is too expensive because it costs $30,000. If the car in question is a 1972 Ford Pinto with 200,000 miles, one would have every reason to feel the vehicle was overpriced. But, a brand new Cadillac with all of its neat options and features could well be worth much more than $30,000.
As a practical matter, common stock prices in aggregate today are not that much higher than they were ten years ago. However, corporate profitability has increased measurably. Therefore, further investigation beyond an absolute level of a stock index is necessary before drawing conclusions about the relative attractiveness, or lack thereof, of common stocks.
We welcome all questions or comments.
Bob Bilkie, CFA