Stock Market Valuations - April 3, 2010

I am updating market valuations now on a monthly basis. I am trying to use data to conclude whether the market is overvalued or undervalued. I decided to use the end of every month as the day to date my data from and to post my article. As always I must mention that just because the market is over or undervalued does not mean that future returns will be high or low. From the mid to late 1990s the market was extremely overvalued and equities kept increasing year after year.


To see my previous market valuation article from late February 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 April 3, 2010:


Current P/E TTM 23





The current P/E is 23 TTM, which is higher than the TTM P/E of 21 the market was valued at in late February. The P/E TTM is currently overvalued. However earnings are still low and the forward P/E is 15. However, I put little to no faith in forecasts so therefore I judge P/E based on the past and not on the future.


Based on this data the market is moderately 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.



Numbers from Previous Market lows


Mar 2009 110.37


Mar 2003 27.92


Oct 1990 14.21


Nov 1987 14.45


Aug 1982 7.97


Oct 1974 7.68


Oct 1966 13.96


Oct 1957 12.67


Jun 1949 5.82


Apr 1942 7.69


Mar 1938 10.63


Feb 1933 14.92


July 1932 10.16


Aug 1921 14.02


Dec 1917 5.31


Oct 1914 14.27


Nov 1907 9.35


Nov 1903 11.67


Historic data courtesy of http://www.multpl.com/


Current P/E 10 Year Average21.69






The 10 year P/E ratio is currently 21.69. This is above the 20.03 measure from my previous article in late February. This number is based on Robert Shiller's data evaluating the average inflation-adjusted earnings from the previous 10 years.





Mean: 16.36


Median: 15.72


Min: 4.78 (Dec 1920)



Max: 44.20 (Dec 1999)


Numbers from Previous Market lows


Mar 2009 13.32


Mar 2003 21.32


Oct 1990 14.82


Nov1987 13.59


Aug 1982 6.64


Oct 1974 8.29


Oct 1966 18.83


Oct 1957 14.15


June 1949 9.07


April 1942 8.54


Mar 1938 12.38


Feb 1933 7.83


July 1932 5.84


Aug 1921 5.16


Dec 1917 6.41


Oct 1914 10.61


Nov 1907 10.59


Nov 1903 16.04


Data and chart courtesy of http://www.multpl.com/


This is moderately over valued from the average P/E as shown above.


Current P/BV 2.23. This is an estimate







The current P/BV is 2.23 , this lower than the 2.45 in late March. I have found a more accurate way to measure P/B so the new measure is probably more accurate then the one from previous articles. In the future I will be using the new measurement.


The average Price over book value of the S&P over the past 30 years has been 2.41. This indicates the market is slightly undervalued 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 2.06





The current dividend yield of the S&P is 1.90. This number is lower than the 2.06 yield from my previous article.


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: 4.30%


Min: 1.11% (Aug 2000)


Max: 13.84% (Jun 1932)


Numbers from Previous Market lows


Mar 2009 3.60


Mar 2003 1.92


Oct 1990 3.88


Nov1987 3.58


Aug 1982 6.24


Oct 1974 5.17


Oct 1966 3.73


Oct 1957 4.29


Jun 1949 7.30


Apr 1942 8.67


Mar 1938 7.57


Feb 1933 7.84


July 1932 12.57


Aug 1921 7.44


Dec 1917 10.15


Oct 1914 5.60


Nov 1907 7.04


Nov 1903 5.57


Data and chart courtesy of http://www.multpl.com/


Stock Market Capitalization as percentage of GDP 84.7%








The current level of 84.7% is higher than the 79.3% number than from my previous article.


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 $12.3 trillion. GDP is approximately which is $14.6 trillio. Between 75-90% market capitalization as percentage of GDP is a fair value, therefore at a current level of 84.7%, the stock market is fairly valued. However, the ratio is getting close to moderately overvalued.





Warren Buffett has stated that market capitalization as a percentage of GDP is "probably the best single measure of where valuations stand at any given moment.”


According to Barron’s the ratio got as low as 40% in the late 1940s, when investors feared another depression, and in the inflationary 1970s.


Historic Data


Min 35% in 1982


Max 148% in 2000.


Data and charts courtesy of Gurufocus.com





Current Tobins1.01 This number is an estimate

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Tobins Q is currently 1.01 which is higher than the level of .86 from late February. The current Tobins Q is 1.01just an estimate I based on data from John Mihaljevic of The Manual of Ideas. It is hard to get an exact number for Tobin’s Q for a specific data. The reason why this number is probably much higher than the number late February, is because at that time I estimated Tobins Q using data from the Federal Reserve. Manual of Ideas has a quarterly newsletter which was released Mid March for which I based the current data on.


The current level of 1.01 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)- overvalued


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


3. P/BV- Slightly undervalued


4. Divdend Yield- Indeterminate/ Fairly valued


5. Market value relative to GDP- fairly valued


6. Tobins Q- Overvalued


In conclusion the market is definitely not extremely over valued based on the above data. However, one can make the argument that the market is moderately overvalued. With the exception of P/BV all the indicators point to at least a slightly overvalued market.


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 or slightly lower 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.