By one measure, stock valuations at ‘post-war high’

January 11 23:34 2015

Is the high-flying U.S. stock market more expensive than you think? You bet it is — if you measure it by the “median” price-to-earnings ratio of stocks listed on the New York Stock Exchange.GTY 459378734 A FIN MAX USA NY

That warning comes courtesy of Jim Paulsen, chief investment strategist at Wells Capital Management. And it comes on the heels of a wild ride to start 2015, with the Dow Jones industrial average plunging 461 points Monday and Tuesday, and then rallying 536-points in a two-day surge Wednesday and Thursday. The blue-chip stock gauge is trading less than 1% off its Dec. 26, 2014, all-time closing high of 18,053.71.

Paulsen points out that while the average P-E of the benchmark Standard & Poor’s 500-stock index (the valuation metric most widely used by Wall Street) kicked off 2015 trading at about 18 times trailing 12-month earnings — which is “slightly above average” but far below its post-war record of more than 30 times earnings in early 2000 — viewing valuation through another lens points to a far more pricey stock market.

Indeed, the median P-E of NYSE-listed stocks (there are nearly 4,000 listed securities on the NYSE) is slightly more than 20 times earnings. That is an “all-time, post-war record high,” says Paulsen, adding that the median NYSE stock is also at a record high relative to cash flow and near a record high relative to book value. (Median means half of the NYSE stocks are trading at higher P-Es and half are trading at lower P-Es.)