Lower Prices Aren't the Same as Bargains

Anecdotes and Allegories

We had a garage sale this weekend, and from that admittedly small survey of the American consumer, the following conclusion can be drawn: People are still willing, even eager, to spend money, but they've got to feel they're getting a major bargain. Even high-quality items sold only if they were priced especially cheap.

Which brings us to the stock market, which was moving up at midday today amid some positive geopolitical developments and an ongoing debate over whether Friday's midday reversal was significant. Somewhat lost in that debate is the question of whether or not the market is cheap; that is, would it appeal to those who frequent Wall Street's version of a garage sale? The "early bird" arrivals who were buying shares at today's open seemed to think so, but the data suggest otherwise.

At Friday's close of 1027.53, the S&P 500's price-to-earnings ratio was 22.7, based on 2001's reported earnings of $45.16. Based on Thomson Financial/First Call's consensus expected 2002 earnings of $50.39, the index's P/E is 20.4. Using Standard & Poor's new "core earnings" criteria, the index's P/E is even higher. Any way you slice it, the market isn't "cheap" by historical or garage-sale standards. ...