The NASDAQ peaked on March 10, 2000 at 5,132 in what is widely considered to be a bubble driven by excessive valuations of Internet and other technology companies. Many economists such as Robert Schiller, author of Irrational Exuberance, believed that the entire market was embroiled in a speculative bubble throughout this period[i]. Application of the RPF Valuation Model to the S&P 500, strongly suggests that a significant bubble did exist.
Looking at the period from 1986 – mid-2009, the dot.com bubble appears as the greatest and most enduring bubble of the entire period:
Prior to the fall, 10 Year Treasury yields increased from 4.6% in November 1998 to 6.2% in March 2000. While the NASDAQ began to run up in late 1999, the S&P 500 Index began to diverge from predicted (using the RPF Valuation Model) in January 1999.
The predicted and actual index levels again reached parity in February 2002. This appears to be a largely interest rate driven event. The chart below shows the same time period, but with 10 Year Treasury yield held constant at 4.75% - the rate in November 1998, before the bubble began to form – as the input for the RPF Model in the “predicted” line in the chart below.
For more on underlying assumptions behind the calculations please see "The Risk Premium Factor: A New Model for Understanding the Volatile forces that Drive Stock Prices" (Wiley Finance) available on Amazon. (http://amzn.to/jRHEAe )
[i] Robert J. Schiller, Irrational Exuberance, (Princeton University
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