I update market valuations on a monthly basis. The point of this article is to measure the stock market based on six different metrics. This article does not look at the macro picture and try to predict where the economy is headed. It only uses these six metrics which have been very good past indicators of whether the market is fairly valued.
I collaborate with my colleague Doug Short for some of the data in the article. Doug is an expert on market valuations, and I encourage readers to visit his site dshort.com
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. However, as I note at the end of the article I expect low returns over the next ten years based on current valuations.
To see my previous market valuation article from last month click here.
Below are six different market valuation metrics as of November 1st, 2010:
The current P/E TTM is 16.8, which is higher than the TTM P/E of 16.1 from last month.
This data comes from my colleague Doug Short of dshort.com.
Based on this data the market is fairly valued. 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 [www.multpl.com]
Current P/E 10 Year Average 21.62
The current ten year P/E is 21.62; this is higher than the PE of 19.84 from the previous month. This number is based on Robert Shiller's data evaluating the average inflation-adjusted earnings from the previous 10 years. Based on my colleague, Rob Bennett's market return calculator, the returns of the market should be as follows:
|Stock Market||Best Possible||Lucky||Most Likely||Unlucky||Worst Possible|
|10-Year Percentage Returns||8.51||5.51||2.51||-0.49||-3.49|
|20-Year Percentage Returns||7.57||5.57||3.57||1.57||-0.43|
|30-Year Percentage Returns||8.31||7.31||6.31||5.31||4.31|
|40-Year Percentage Returns||7.24||6.34||5.44||4.44||3.44|
|50-Year Percentage Returns||7.25||6.45||5.65||4.95||4.25|
|60-Year Percentage Returns||7.66||7.01||6.36||5.76||5.16|
My colleague Doug Short thinks this numbers are a bit inaccurate, because the number I used as it does not include the past several months of earnings, nor revisions. Doug calculates P/E 10 at 21.4.
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
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 [www.multpl.com]
This is moderately over valued from the average P/E as shown above.
Current P/BV 1.84
This is a very rough estimate, it is nearly impossible to get an exact number for P/B on a specific date to my knowledge.
The current P/BV is 1.84; this is below P/B of 1.84 I measured in my previous article.
The average Price over book value of the S&P over the past 30 years has been 2.41. This indicates the market is undervalued. 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 1.86
The current dividend yield of the S&P is 1.86. This number is lower than the 1.86% yield from last month.
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