Stock market prices around the world have been rising for the past four years almost without interruption. Recently the MSCI world index, the most comprehensive gauge of global share prices, has been hitting records almost daily – so much so that it is now 15 per cent higher than the record it hit in 2000 at the climax of the millennium internet boom and is up 134 per cent from the low point it reached on March 12, a week before the American-led bombing of Baghdad started. It was only last week, however, that the most widely followed American stock market index, the Standard & Poor’s 500, managed to break through its March 2000 high.

Considering that this 2000 record was rapidly followed by the biggest collapse in US share prices since 1929, it seems appropriate to ask whether investors who buy shares or other assets at today’s prices are setting themselves up for a similar disaster. And are other assets, such as London property, which are critically dependent on the prosperity of financial markets, similarly exposed?

The probable answer to both these questions is “no” – or, at least, not yet. This bull market will doubtless end in tears, as has every great stock market rally, but before that happens share prices are likely to go substantially higher. At present the conditions do not appear to exist for a severe setback, by which I mean a fall much more painful than the 5 to 10 per cent corrections that occur from time to time in every stock market move.

There is an obvious reason to disregard prophecies of a repeat of the dot-com debacle. It is that share prices are not really anywhere near as high as they were seven years ago. How can I say this when Wall Street has just exceeded its 2000 record? There are four simple arithmetical differences between conditions today and those that prevailed in the dot-com bubble.

While the S&P 500 is today slightly higher than it was in early 2000, there are three crucial differences between now and then. The first is simply that seven years have elapsed and in this period the value of US economic activity, as measured by gross domestic product, has grown by 41 per cent. Global economic activity, boosted by the spectacular growth of China and other emerging economies and flattered by the declining value of the dollar, has expanded by 60 per cent.

Moreover – and this is the second arithmetical difference – the rapid expansion of the world economy since March 2000 has been accompanied by a redistribution of global income in favour of profits. As a result, shares today are nowhere near as expensive as they were in 2000 in relation to the corporate earnings that they represent. In March 2000, the 500 shares in the S&P index were trading, on average, at 31 times their reported earnings. Today that ratio is only 18. Since this is almost exactly the average price-earnings ratio over the past 50 years (17.2), it is hard to argue that shares today are grossly overvalued in relation to profits. By contrast, in the internet boom any reasonable analysis of stock market prices showed that the S&P 500 was overvalued by about 70 per cent relative to the historic average, while most of the technology stocks that had powered that bull market were trading at anything from double to ten or more times their reasonable valuations.

This observation leads to a third obvious change since Wall Street was last this high. Seven years ago, the bull market was driven almost entirely by shares representing just three economic sectors – electronic technology, media and telecommunications. These so-called TMT stocks represented only about 10 per cent of the US economy and a far smaller share of the global economy, yet at the climax of the boom they comprised almost 50 per cent of global stock market values. Almost any reasonable economic analysis of competitive conditions in the TMT sectors suggested that most of these stocks would collapse. As I said repeatedly in this column eight years ago, many of these shares would not fall by just 30 or 50 per cent, but by 90 per cent or more. In the end, this collapse duly happened.

Today, conditions are very different. The bull market is not driven by one or two very overvalued sectors but is quite broadly based, with most industries generating good results. Although I believe that some of today’s most popular investments, such as heavy industry and commodity stocks, may be riding for a fall, it is hard to point to any companies that are remotely as overvalued as were the darlings of the TMT boom seven years ago.

A final difference is an even simpler matter of arithmetic. While the S&P 500 and the MSCI world index have hit new highs, most other stock market indices are still somewhat lower than they were seven years ago. London’s FTSE 100 is 4 per cent below its record of 6,930, Frankfurt’s DAX is 1 per cent off its peak and Tokyo’s Nikkei is 14 per cent below its 2000 high. How can the MSCI world index be hitting new highs daily, while most global stock markets are below their records? The answer is simple: the world index is measured in dollars. This means that a large part of its stratospheric ascent in the past five years has simply reflected the dollar’s decline.

If we compare the S&P 500 with the FTSE 100, it looks as if Wall Street has done 5 per cent better than London in the past seven years. But once we take account of the rise of sterling against the dollar, it turns out that British share prices have outperformed American investments by almost 30 per cent. So the new records hit last week by US share prices were not really records at all for international investors who measure their returns in euros, sterling or Swiss francs. For these investors, Wall Street is, in fact, almost 30 per cent cheaper than it was in 2000.

Putting these observations together points to a clear conclusion. In March 2000, when stock market prices on Wall Street were last at today’s levels, a crash was a mathematical certainty – as this column, along with many others, pointed out. Today one can say with almost equal confidence that the mathematical conditions simply do not exist for a stock market collapse.

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