Thread by @LynAldenContact

A lot of people are understandably comparing current market conditions to the 2000 dotcom bubble.

For example, the ratio of market capitalization to GDP is now at record levels.

There are, however, some differences. It's useful to know both the similarities and differences.

On one hand, a lot of the excess is concentrated in private equity and the IPO sector, with a record % of unprofitable IPOs, which now seems to be unwinding.

Growth has outpaced value in general, similar to 2000, and unlike 2007. In 2007, value had outpaced growth.

Additionally, most pre-tax broad stock valuation metrics including price-to-sales, price-to-EBITDA, market-cap-to-GDP are higher now than they were during the 2000 dotcom bubble.

Many people say that the reason is because the S&P 500 has more global sales than they use to, but this isn't really the case over the past 10-20 years. In fact, the percent of international sales for the S&P 500 is DOWN from a decade ago.

It really is just valuations, folks.

On the other hand, post-tax valuation measures such as price-to-earnings, CAPE, dividend yield, price-to-book, are extremely high, but not as high as 2000.

This is largely because effective federal corporate tax rates are only one-third today of what they were in 2000. Corporations get to keep a bigger chunk of their EBITDA & sales than ever to use for dividends, buybacks, and so forth.

(If this ever reverses upward, look out!)

Lastly, bond yields were 6% during 2000, and less than 2% today. The equity risk premium hit its all-time low in 2000, but is way higher today. So, stocks are very expensive, but so are bonds.

This chart shows the ERP compared to 10-year forward returns of stocks over bonds.

That's why, between stocks and bonds, I prefer a third option for the long run: gold. I have it within my diversified portfolio (along with silver, etc).

This chart shows the relative 10-year forward performance of stocks vs gold at various levels of the CAPE ratio.