Due to the recent popularity of my recent article regarding Stock market valuations I have decided to update the serious on a regular basis. I am updating market valuations on a monthly basis would be logical and a benefit to the readers. I decided to use the end of every month as the day to date my data from and to post my article. To see my previous article click here
The content will be mostly the same I will be mostly updating the numbers, and the commentary as to what level the market valuations are at. I will be adding more historical data as I find it.
Below are six different market valuation metrics as of January 28, 2010:
Current P/E TTM 84.3
The current P/E TTM 84.3, which is slightly lower the TTM P/E of 87 the market was valued at in late December
On a TTM basis the S&P has a P/E of 84.3. Based on this data the market is significantly overvalued. However I do not think this is a fair way of valuing the market when considering the significant decrease in earnings over the past year. To get an accurate picture of whether the market is fair valued based on P/E ratio it is more accurate to take several years of earnings.
Current P/E 10 Year Average 19.66
The 10 year P/E ratio is currently 19.66. This is slightly below the 20.42 measure from my previous article in late December. This number is based on Robert Shiller's data evaluating the average inflation-adjusted earnings from the previous 10 years.
Mean: 16.35
Median: 12.87
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)
Numbers from Previous Market lows
March 2009 13.32
March 2003 21.32
Nov1987 13.59
Aug 1982 6.64
Dec 1974 8.29
June 1932 5.57
Aug 1921 5.16
Data and chart courtesy of http://www.multpl.com/
This is slightly over valued since the average P/E is 16.35 as shown above.
Current P/BV2.41 This is an estimate
The current P/BV is 2.41, this is slightly higher than the 2.22 in late December 2009
The average Price over book value of the S&P over the past 30 years has been 2.41. This indicates the market is fairly valued. Book value is considered a better measure of valuation than earnings by many investors including legendary investor Martin Whitman. He states that book value is harder to fudge than earnings. In addition book value is less affected by economic cycles than one year earnings are. P/BV therefore provides a longer term accurate picture of a company's value, than a TTM P/E.
Current Dividend Yield 2.07
The current dividend yield of the S&P is 2.07. This number is slightly lower than 2.29 yield from December 30,2009
It is hard to determine on this basis whether the market is overpriced. The dividend yield for stocks was much higher in the begging of this century than the later half. The dividend yield on the S&P fell below the yield on Ten-Year treasuries for the first time in 1958. Many analysts at the time argued that the market was overpriced and the dividend yield should be higher than bond yields to compensate for stock market risk. For the next 50 years the dividend yield remained below the treasury yield and the market rallied significantly. In addition the dividend yield has been below 3% since the early 1990s. While I personally favor individual stocks with high dividend yields, I must admit that the current tax code makes it far favorable for companies to retain earnings than to pay out dividends. Finally, as I noted above the current economic environment has zero percent interest rates and low bond yields. During periods where yields are low it is logical for income oriented investors hungry for yield to be bid up the market, and dividend yields to decrease. I think it is hard to claim the market is overbought based on the low dividend yield.
Mean: 4.37%
Median: 4.40%
Min: 1.11% (Aug 2000)
Max: 13.84% (Jun 1932)
Data and chart courtesy of http://www.multpl.com/
Stock Market Capitalization as percentage of GDP 79.3
The current level of 79.3% is slightly lower than the 81.2% on December 30, 2009
Stock Market Capitalization as a percentage of GDP is another metric albeit less commonly used than other metrics, to value the market. The total stock market index has a current capitalization of about $11.3 trillion. This is 79.3% of GDP which is $14.2 trillion; this is close to the historical average. Between 75-90% market capitalization as percentage of GDP is a fair value, therefore at a current level of 79.3%, the stock market is fairly valued.
Warren Buffett has stated that market capitalization as a percentage of GNP is "probably the best single measure of where valuations stand at any given moment.”
The content will be mostly the same I will be mostly updating the numbers, and the commentary as to what level the market valuations are at. I will be adding more historical data as I find it.
Below are six different market valuation metrics as of January 28, 2010:
Current P/E TTM 84.3
The current P/E TTM 84.3, which is slightly lower the TTM P/E of 87 the market was valued at in late December
On a TTM basis the S&P has a P/E of 84.3. Based on this data the market is significantly overvalued. However I do not think this is a fair way of valuing the market when considering the significant decrease in earnings over the past year. To get an accurate picture of whether the market is fair valued based on P/E ratio it is more accurate to take several years of earnings.
Current P/E 10 Year Average 19.66
The 10 year P/E ratio is currently 19.66. This is slightly below the 20.42 measure from my previous article in late December. This number is based on Robert Shiller's data evaluating the average inflation-adjusted earnings from the previous 10 years.
Mean: 16.35
Median: 12.87
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)
Numbers from Previous Market lows
March 2009 13.32
March 2003 21.32
Nov1987 13.59
Aug 1982 6.64
Dec 1974 8.29
June 1932 5.57
Aug 1921 5.16
Data and chart courtesy of http://www.multpl.com/
This is slightly over valued since the average P/E is 16.35 as shown above.
Current P/BV2.41 This is an estimate
The current P/BV is 2.41, this is slightly higher than the 2.22 in late December 2009
The average Price over book value of the S&P over the past 30 years has been 2.41. This indicates the market is fairly valued. Book value is considered a better measure of valuation than earnings by many investors including legendary investor Martin Whitman. He states that book value is harder to fudge than earnings. In addition book value is less affected by economic cycles than one year earnings are. P/BV therefore provides a longer term accurate picture of a company's value, than a TTM P/E.
Current Dividend Yield 2.07
The current dividend yield of the S&P is 2.07. This number is slightly lower than 2.29 yield from December 30,2009
It is hard to determine on this basis whether the market is overpriced. The dividend yield for stocks was much higher in the begging of this century than the later half. The dividend yield on the S&P fell below the yield on Ten-Year treasuries for the first time in 1958. Many analysts at the time argued that the market was overpriced and the dividend yield should be higher than bond yields to compensate for stock market risk. For the next 50 years the dividend yield remained below the treasury yield and the market rallied significantly. In addition the dividend yield has been below 3% since the early 1990s. While I personally favor individual stocks with high dividend yields, I must admit that the current tax code makes it far favorable for companies to retain earnings than to pay out dividends. Finally, as I noted above the current economic environment has zero percent interest rates and low bond yields. During periods where yields are low it is logical for income oriented investors hungry for yield to be bid up the market, and dividend yields to decrease. I think it is hard to claim the market is overbought based on the low dividend yield.
Mean: 4.37%
Median: 4.40%
Min: 1.11% (Aug 2000)
Max: 13.84% (Jun 1932)
Data and chart courtesy of http://www.multpl.com/
Stock Market Capitalization as percentage of GDP 79.3
The current level of 79.3% is slightly lower than the 81.2% on December 30, 2009
Stock Market Capitalization as a percentage of GDP is another metric albeit less commonly used than other metrics, to value the market. The total stock market index has a current capitalization of about $11.3 trillion. This is 79.3% of GDP which is $14.2 trillion; this is close to the historical average. Between 75-90% market capitalization as percentage of GDP is a fair value, therefore at a current level of 79.3%, the stock market is fairly valued.
Warren Buffett has stated that market capitalization as a percentage of GNP is "probably the best single measure of where valuations stand at any given moment.”
