The S&P 500 has more than tripled in value since early 2009.

It's one of the best five-year periods in market history, roughly matching the 1995-2000 bull market that created one of the largest bubbles ever. 

What's that mean for market values today?

Depends who you ask. 

James Paulsen, chief investment strategist at Wells Capital Management, noted last week that the median S&P 500 company now trades at the highest price-to-earnings ratio since his records began in 1950.

The only reason the market as a whole doesn't look as overvalued as the median component is because some of the S&P 500's largest companies that carry the most weight in the index, like ExxonMobil (NYSE:XOM) and Apple (NASDAQ:AAPL), are still fairly cheap. 

The median company is also near a record high measured on price-to-book value and price-to-cash flow. 

These are eye-opening statistics that show how much the rally of the last five years may have borrowed from future returns. 

But then again...

There are all kinds of ways to value the market. None is necessarily right or wrong, because what matters -- what moves markets -- is whatever investors care about at a given moment. 

And what do people care about right now? Dividends, for one. 

With interest rates at rock-bottom levels, dividends have become wildly popular as one of the last remaining places you can earn a yield above the rate of inflation. They became viewed as bond substitutes for income-starved investors. Boring, low-growth sectors that emphasize dividends, like utilities, trade at a higher valuation than high-growth technology stocks. The clamor for dividends in the last five years has been insatiable. 

Two things happened recently to help that trend: 

  • Interest rates on Treasury bonds have plunged. Ten-year Treasuries now yield 1.8%, from 2.9% a year ago. 
  • Dividend payouts have surged. The S&P 500 is up 72% since 2010, but S&P 500 dividends are up 84%. 
Combine the two, and 51% of S&P 500 companies now have a dividend yield above the yield on 10-year Treasury bonds. That's the highest going back 15 years, above even the levels of early 2009, when the market bottomed: 
Images

Source: S&P Capital IQ, Federal Reserve. 

Relative to bonds, S&P 500 companies may be about as cheap as they've ever been. 
 
The S&P 500 as a whole now yields more than Treasury bonds. That doesn't happen very often, but history says stocks tend to do extraordinary well when it does.
 
Is this a better measure of market value than Paulsen's metric? I don't know. I don't think anyone does. 
 
But it may be more relevant to the average investor today -- right now -- who is deciding how to allocate his or her money. You can increasingly find more yield in the stock market than you can the bond market. As long as that's the case, it's hard to imagine flocks of investors giving up on stocks and running to the "safety" of bonds.
 
The big point here is that different metrics, both of which seem reasonable, can show polar opposite views of market valuation. That's dangerous, because no matter how you feel about stocks you can find data to back yourself up. This is as true for Paulsen's metric as it is my own. 

Depending on what metrics you want to use, today's market looks somewhere between dirt cheap and bloody expensive. I really don't think it's obvious which side is right. My feeling is dividends are one of the biggest forces driving stocks right now, but someday that will change. Maybe people will start caring about Paulsen's metric -- or something else entirely. 

"There are no rules about what a stock, bond, currency, commodity, house, car, dog, cat, diamond, bicycle, soap dish, refrigerator, concert ticket, plane ride or glass of wine are worth," James Osborne, president of Bason Asset Management, wrote recently. "They are worth what people are willing to pay for them, which is what markets are all about. That's the value."

Check back every Tuesday and Friday for Morgan Housel's columns. 

For more:

 

Morgan Housel owns shares of ExxonMobil. The Motley Fool recommends and owns shares of Apple, and has a disclosure policy.