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Has the stock market become too narrow?

  • Richard W. Kopcke
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    The price of equity has soared during the past five years, stoking concerns that stocks' prices might have risen too far, too fast. These concerns became more pressing as the values of equities rose much more rapidly than earnings during 1998 and early 1999, lifting stocks' prices to record highs relative to their earnings. Although many indexes of stocks' prices continued to rise sharply in 1998 and 1999, fewer stocks contributed to this performance. The market became more narrow as the running count of stocks whose prices were rising fell behind that for stocks whose prices were dropping. ; This article reviews the valuation of the equities constituting the S&P 500 index between 1968 and 1999. Although the ranks of the winners thinned and the gap separating the performance of the winners from laggers increased, the value of most equities remained high by historical standards. Analysts generally expected most companies' earnings to grow comparatively rapidly in subsequent years. The author suggests that this optimism might be the market's principal weakness. For companies' earnings to support the current valuation of equity, the economy must grow unusually rapidly for the next decade and beyond. The evidence does not yet confirm that growth has increased sufficiently or will last long enough to pay the expected dividends.

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    File URL: http://www.bostonfed.org/economic/neer/neer2000/neer600c.htm
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    File URL: http://www.bostonfed.org/economic/neer/neer2000/neer600c.pdf
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    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2000)
    Issue (Month): Nov ()
    Pages: 31-43

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    Handle: RePEc:fip:fedbne:y:2000:i:nov:p:31-43
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