Valuations Are High, But Dispersion Is Low

by: S&P Dow Jones Indices

By Fei Mei Chan

"Stocks Have Froth but No Bubble," in today's Wall Street Journal argues that while stocks are sitting at the highest valuations seen in many years, the market is not in a bubble. Despite similarities to early 2000 by some measures, other distinguishing features of trading bubbles (such as high trading volume and high leverage) are subdued.

Another way to see this is by looking at the dispersion-correlation map. You don't have to have high dispersion to have a crisis. But, as the chart below shows, times of calamity are often accompanied by higher dispersion as, for example, in 2000 and 2008. S&P 500 dispersion did rise late last year, but after a temporary spike at the end of November 2016, dispersion has fallen back to historically low levels. It is also significantly lower compared to this time last year. Dispersion can change, sometimes quickly, but until it does, indications are that there's no need to worry as of yet.

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