Stock Market Valuation May 2nd 2011


stock market bearThe current level of the S&P500 is 1,364, and the Dow is at 12,811–higher than last month, but valuations remained overall the same. As evidenced below, market valuations did not change much over the last month. I update market valuations on a monthly basis. The point of this article is to measure the stock market based on seven different metrics. This article does not look at the macro picture and try to predict where the economy is headed. It only uses these several metrics which have been very good past indicators of whether the market is fairly valued.
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. In addition, individual stocks can be found that will outperform or underperform the market regardless of current valuations.

To see my previous market valuation article from last month click here.

Below are eight different market valuation metrics as of May 1, 2011:

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To Recap

1. P/E (TTM) – Fairly Valued 15.9

2. P/E 10 year – Extremely overvalued 24.11

3. P/BV – Undervalued – 2.16

4. Dividend Yield – Indeterminate/ overvalued 1.72

5. Market value relative to GDP – Moderately Overvalued 98.8

6. Tobins Q – Extremely overvalued 1.18

7. AAII Sentiment – Investors are slightly bullish

8. GMO – Overvalued

In conclusion, the market is overvalued based on the above data. Tobins Q, Shiller PE and AAII data are all indicating that investors are too bullish and valuations are too high.

To read the full article on Guru Focus click on the following link-

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