Federal Reserve officials then hastened to assure the press that a rise in interest rates was not in the offing, and that Greenspan's expressions of concern were merely expressions of concern. The stakes for investors are enormous. It refers to the prices stocks ought to sell for based on businesses' real economic value, apart from speculation. In a typical year, a typical stock is priced at about 15 times its 10-year average of earnings. Today the typical stock sells for nearly 30 times its 10-year average of earnings.
Stocks are tradable pieces of paper that are merely a claim on a corporation's future earnings.
And the ratio of stock price to earnings is twice what it traditionally has been. In the past, whenever general stock prices have gotten as high relative to fundamentals as they are today, the next decade has been an extremely bad one in which to invest in the stock market. That would mean that any given level of profit can sustain a higher stock price. In the past, demand for stocks was limited by fear of risk . Investors could look to the bond market and see the chance for a decent return with total safety.