How Costly Is This “New Economy”?

Chart of the Week for March 17-23, 2000

The term “New Economy” has been tossed around repeatedly lately. What exactly does it mean? In the past four years, we’ve seen unprecedented 4% annual growth coupled with a declining jobless rate. Personal income and homeownership have risen to record levels. This New Economy has captured the ability to sustain exponential economic growth and simultaneously escape inflationary pressures amidst a low unemployment rate environment.

While valuations have generally risen across the board since August of 1998, the chart above indicates somewhat of a divergence in the small-cap arena since last October.

Price-to-earnings ratio, simply stated, is the amount of money an investor is willing to pay for every dollar per share of a company’s earnings. The more investors are willing to pay, the greater the perceived future earnings prospects are said to be. Apparently investors are confident that fast growing Internet and technology issues have the ability to sustain this New Economy for the foreseeable future.

“Old Economy” brick and mortar companies (more commonly found in the Dow Jones Industrial Average as well in the S&P 500 Index) appear less costly by comparison. As such, they may pose a buying opportunity that will ultimately pay off in the long-run if this New Economy does not unendingly persist.

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