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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Stock Market Valuation January 28,2010- Fairly Valued

January 28, 2010 | About:

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.”

Ratio = Total Market Cap / GDP Valuatoin
Ratio< 50% Significantly Undervalued
50%< Ratio< 75% Modestly Undervalued
75%< Ratio< 90% Fair Valued
90%< Ratio< 115% Modestly Overvalued
Ratio > 115% Significantly Overvalued
Where are we today (01/28/2010)? Ratio = 79.3%, Fairly valued

Historic Data

Min 35% in 1982

Max 148% in 2000.

Data courtesy of Gurufocus.com

Current Tobins .85

Tobins Q is currently .85 which is slightly lower than the level of .91 from December 30,2009. The current Tobins Q n is just an estimate based on data from the Federal Reserve, it is hard to get an exact number for Tobin’s Q.

Another value of stock market valuation which is less commonly used than many of the above methods is the Tobins Q. The current level of .85 compares with the Tobins Q's average over several decades of data of approximately .72. This would show that the market is slightly over valued. In the past Tobin's Q has been a good indicator of future market movements. In 1920 the number was at a low of .30, the next nine years included phenomenal gains for the market. In 2000 Tobin's Q almost reached a record high of nearly 2, and the market declined subsequently about 50% by 2003.


Historic Tobins Q

Market Low 1932 0.30

Market High 1929 1.06

Source "John Mihaljevic, The Manual of Ideas" link to website: http://www.manualofideas.com/q/index.html

Average .72 (source: Jeremy Siegel)

To Recap

1. P/E(TTM)- Extremely overvalued

2. P/E(10 year average)- slightly over valued

3. P/BV- Fairly Valued

4. Divdend Yield- Indeterminate/ Fairly valued

5. Market value relative to GDP- fairly valued

6. Tobins Q-Slightly Over valued

In conclusion the market is definitely not extremely over valued based on the above data. The argument can be made that stocks are slightly over valued based. However the historical data fails to take into account current record low interest rates. I know not many investors take issue with my inclusion of interest rates in the equation. However, I think that most investors look at the stock bond alternative. Right now you can get some blue chip stocks with dividend yields close to the Ten year treasury yield. I think with taking into account interest rates the market is fairly valued.

I am not making a prediction but the average return of the market is 9.5% per year. If the market is fairly valued one should expect the same return in the future.

Disclosure: none

Note: I have received numerous suggestions on how to improve my monthly series. I tried to incorporate these ideas in my current article. Please email me or leave a comment if you would like to provide further suggestions. (I will have more historic data for dividend yield and P/E TTM in my next article).

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 4.1/5 (23 votes)


Goo - 10 years ago    Report SPAM

Thanks for this very good analysis. I would tend to use the full market cap of the Wilshire 5000 Index instead of the float. The current full market cap is around 13 trillion.
Dr. Paul Price
Dr. Paul Price - 10 years ago    Report SPAM

Should youir headline read 2010 - instead of 2009?
Yswolinsky - 10 years ago    Report SPAM
Thanks for informing me. I hate when the New Year starts because I always do that. Fixed now.
Yswolinsky - 10 years ago    Report SPAM
Any indicators readers would like to see besides the six that I used?
MGriff - 10 years ago    Report SPAM
Price/Sales, more reliable than Price/Earnings.
Yswolinsky - 10 years ago    Report SPAM
ill have to see if i could get the data
Benethridge - 10 years ago    Report SPAM
Nice data compilation. Thanks for putting this together for us.

Kuuks - 10 years ago    Report SPAM

I don't think looking at historical Price/Sales would be of much help considering how the structure of the economy has changed over the century. That is, from manufacturing (seconday) to knowledge/service (tertiary) economy. The latter is likely to be significantly higher margin. My guess is that using P/S would make it seem like the market is significantly overvalued based on long term average ratios.
Trotta - 10 years ago    Report SPAM
I'm not sure that the conclusion is fully justified by the analysis. IMHO, it would be better to say that the expected return is 8-8.5%, where 6% comes from economic growth (which translates into normalized earnings or book value one-to-one) and 2-2.5% comes from the dividend yield you quote. And this presupposes no change in overall market valuation, which may change the yield a lot.

In fact, one could argue that most investors (whether they are honest with this or not) aim at catching the change in valuation by riding the wave upwards (and sometimes downwards as well). It is really hard for humans to be patient and let the economy grow and with it their capital.
Yswolinsky - 10 years ago    Report SPAM
Thanks Trotta I was debating whether I should leave out that last sentence or not. i think I should have. On average market return is about 9.5% but that due to dividends and corporate earning growths since P/E is high now(even if interest rates justify it), We will probably have to see much quicker corporate earnings growth(unlikely) to justify that number.
Benethridge - 10 years ago    Report SPAM

"6% comes from economic growth (which translates into normalized earnings or book value one-to-one)"

You make a good point in general, but can you explain the above statement a bit please?
Yswolinsky - 10 years ago    Report SPAM
I think he means is market growth is determined by Corp Earnings growth plus dividend yield plus change in P/E

On Average corp earning growth over normal economic times has averaged 6%

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Anders - 10 years ago    Report SPAM
--> Second reminder (and last)..

Buffett illustrated the Mcap as %age of the country's business - the GNP... not GDP as stated in the article above...if the relationship falls to the 70-80% area then you will probably come out ok if you buy stocks ... during the IT bubble it went to 200% and you should be fearful.. dont complicate the quantification..!

Richday101 - 10 years ago    Report SPAM
Jacob, very interesting additions to the previous article. Thanks for the update. I don't rely on P/E ratios as it blows up in crisis e.g. the last year with extremely low earnings. Also people argue using operating earnings versus GAAP earnings. Thus the introduction of 10 year average P/Es to take care of years when P/E are too high. I would suggest adding P/S and P/CF or P/FCF if the data is available. I would also suggest deleting the S&P dividend analysis. Dividend payments are discretionary and in tough times they are reduced or eliminated. Also low dividend yields says the market is overvalued so one must use reverse thinking.

I would also suggest an increment of 25% in each case. The middle increment of 15% (i.e. 75%< Ratio< 90%) is arbitrary. Perhaps changing all the increments to 20% should be considered.

Overall, an excellent article and I look forward to the monthly updates.

Best regards,

Richard Daley
Max7777 premium member - 10 years ago

Great Job and thanks for doing this on a monthly basis. I tend to do it every quarter. I think your valuation are the best one can find for the Long Term valuation of the market.

Since you ask "Any indicators readers would like to see besides the six that I used?"

I would agree that what you have is enough for long term valuation. But historically these valuation indicators can stay in the wrong for almost a decade, which historically is more than most investors can hang in there. So I tend to look at your valuations and then also add 3 other indicators:




I realize many on this site would not be interested in them, but if anyone is, here is what these are telling us now:


Fed is very accommodating right now: ( Jeremy Grantham of GMO said recently one of Lessons Learned in the Last Decade was to pay even more attention to the Fed) Interest rates are low (Positive) there is no inverted yeild curve (Positive). The Fed is trying to do all it can to help the market (Positive)


Trend is still upward for long term investors: Positive long term but medium term problems,using the indices relations to their 200, 50 and 10-day moving averages for the long, But The S&P 500 is within striking distance of its 50-day moving average. And 50 and 10-day moving averages suggest intermediate and short-term Negative trends.


-flow of funds show a lot more interest in Bonds than in Equity, The difference was huge at the end of 2009, about 300 billion to 5 billion, so investors were piling into bonds rather than stock. (A positive indicator)

On the other hand, Dumb Money was very positive even in the last few weeks (A very negative point)

The "Dumb Money" (1 -Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio) This indicator even after the recent 7% downturn shows that these investors remain extremely bullish (So we need to be very cautious, since they tend to be wrong)

Smart money: (1- public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders.) The Smart Money indicator is neutral to bearish.

So overall Sentiment is Neutral to Negative.

If I add your 6 valuation indicators to these 3, so one keeps them in context,

Your own Recap

1. P/E(TTM)- Extremely overvalued

2. P/E(10 year average)- slightly over valued

3. P/BV- Fairly Valued

4. Dividend Yield- Indeterminate/ Fairly valued

5. Market value relative to GDP- fairly valued

6. Tobins Q-Slightly Over valued

Added indicators:

7- Fed - Positive for the market (or undervalued)

8- Trend Long term Positive , Medium term Negative, (so about Fair )

9-Sentiment: Neutral to Negative - (slightly overvalued)

So even after adding these, I feel your conclusion is still valid: we are still about Neutral.

or in your words:

"In conclusion the market is definitely not extremely over valued based on the above data. The argument can be made that stocks are slightly over valued."
Yswolinsky - 10 years ago    Report SPAM
thanks max, I agree the market can stay under or over valued for a long period of time as is clearly evidenced from the massive over valuation that lasted the whole late 90s. I started the series because I got sick of hearing the market was over valued because of p/e ttm every day by pundits. So I decided to look at other measurements.

The one indicator you mentioned I thought of using is sentiment numbers since they are a good contrarian indicator.

Thanks for the post
Yswolinsky - 10 years ago    Report SPAM
I have been asked about P/S and P/CF I will see how much data I can get on it. If I can get the data, I will include it.

I know P/E TTM is flawed but I still wanted to included at least to give a picture of what the market is trading at based on short term earnings, but as I mention in the article 10 yr is better. I think 3 or 5 year would be the best since 10 year provides less room for growth.

I mentioned in the article the dividend yield is no longer a good indicator but I still think it is good to include, one reason being people can compare it to current treasury or corp bond yields.

Thanks for the comments I hope to have more historic data in the next series at the end of Feb. I would have included it in this one but have been busy reading books and doing book reviews,some upcoming interviews, and working on my new website http://valuewalk.com/
Max7777 premium member - 10 years ago

Thanks for your comments and I agree that market valuation and sentiment matter most. I would say after that it is the Fed matters a lot and last is the trend, I realise many would not want to include Trend indicators here, but I go by what the data shows and the data over several decades shows all 9 indicators have some value.

In fact, I recall reading that P/S was a better indicator than PE as far as predicting future price movement. That was until every one used it and it lost some of its value a few years ago.

According to a study of 45 years of stock market data see "What works on Wall Street" by O'Shaughnesy price to sales out-perform all other measurements (I think Ken Fisher came up with the concept and also had some data on this in his book 3 Questions..) . Low price to cash flow stocks do better than high p/cfl stocks. Low price to book stocks tend to perform better than high p/b stocks. But Price to sales ratio was the best single value ratio to use as it did better than all the others like PE, P/B, Div yield, etc... Now most the studies were not at the market level, but for individual stocks, still I have to assume that what worked best at the stock level would also work best at the market level.

Sentiment is a great contrarian indicator and I use to look at put call ratios but this no longer works well as an indicator, now I prefer the smart money vs dumb money. Most the time it shows excess better than many other indicators.

A last note, the reason I do pay attention to trend, is not that I am a momentum player, but studies show Relative strength is the only growth variable that consistently beats the market itself. So trend does matter. 200 day moving average has relatively good data supporting it too.

To me flow of funds also matters as it shows how people are voting with their dollars..

I also agree that You or anybody should use only what they understand and are comfortable with.

Thanks again for all the work and data.

Benethridge - 10 years ago    Report SPAM
How do you know that the "smart money" is really so smart? I mean, there was a time long ago that everyone just assumed that the average fund manager could easily beat the S&P 500 average. It seemed like common sense at the time....but then someone (I forget who) proved that they were no better than a monkey with a dart board at picking stocks.

Do you have data to back up the "smart money" claim similar to the way gurufocus.com backs up the various guru claims-to-fame?

"I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer." - Warren Buffett

Yswolinsky - 10 years ago    Report SPAM
Thanks again for the comments Max, and I appreciate your reading the article. I only started this monthly series after I got so many responses and realized people like the idea. I think it is a lot more informative than some pundit quoting p/e ttm and saying the market is over valued. I think next article when I write to recap I will write next to ttm (extremely over valued/ not relevant data) or something like that.

I really would like to find the P/S, and P/CF the problem is since P/E is so popular it is hard to find data on the other topics. I will work on it though.

Ben I think you might be referring to Burton Malkiel. Not sure it was him or one of the other Efficient market believers. It might even be John Bogle who is not a full fledged EM believer like Malkiel and others.
Benethridge - 10 years ago    Report SPAM
?? Not sure what you mean. Are you referring to the smart money question or the Buffett quote?

Yswolinsky - 10 years ago    Report SPAM
I was referring to the dartboard comment

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