This Week In Finance

"Are Stocks in the Stratosphere?"

The answer to the titular question is yes, at least if one believes the Wednesday, March 4th issue of The Wall Street Journal.

I find that current stories such as the one appearing on page C1 of the Journal seem to lend themselves to class discussion. In this case, the story entitled "Stocks are in Stratosphere, by Some Measures" contains a number of indicators you might find useful to discuss with your students.

First, a graph of the market (i.e., S&P 500) P/E ratio is provided in the story. The graph runs from 1991 to the present, and the and appears to peak at about 25 in 1992, declining, then rising to a similar level today. Ask students: what does the P/E really measure? What does the market P/E measure, and what does the firm P/E measure? Are the interpretations identical?

Now dig up a graph of the market P/E going back to the 1950s. (Long-term graphs have appeared in recent issues of the Journal as well as Barron's. What's amazing is the range of market P/Es over the last 40 years! While pundits often speak of the "historical average P/E" as if it is some stable long-term value, in actuality, that figure has fluctuated quite broadly. Ask students what that suggests. And if you're inclined, give them a briefly lesson in macroecomic history and relate that to the fluctuating P/Es.

In short, force those students to think!

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