Stock Market Valuations: Too High, Too Low or Just Right?
By David Edwards
About this article:
A
recent column on valuations by Peter Eavis reminded me that determining fair value for the stock market is more complicated than just checking the S&P 500's price-to-earnings ratio vs. its historical average. The P/E ratio should expand when interest rates, inflation rates and investor uncertainty is low, contract as these parameters rise. So how do I determine whether the stock market is fairly valued? Unfortunately, there's no magic touchstone, but here are several models that can provide guidance.
The following chart shows yields on the 10-year treasury bond, inflation rates (year-over-year CPI) and the earnings/price ratio of the S&P 500 since 1953. (The E/P is the inverse of the P/E ratio; the conversion allows pictorial representation of spread relationships.)
Source: Robert Shiller (http://www.econ.yale.edu/~shiller/), author of "Irrational Exuberance."
In the 1950's, fear of the 1929 stock...
Or, call us at 1-866-321-TSCM (8726) Monday-Friday, 8 a.m.-6 p.m. ET.
Outside the U.S. and in Canada, call 1-212-321-5200.
|
|
|
 |
If you decide to subscribe and you're not completely satisfied with TheStreet.com RealMoney, just call us within the first 30 days of your subscription and we'll refund your full annual subscription price — guaranteed.
|
|
|
|
|
If you choose a 14-day free trial of RealMoney and you do NOT call to cancel within those 14 days, you will pay $129.95 — a $100 savings off the regular annual subscription price of $229.95. Unless you cancel before the end of that year, your subscription will automatically renew for another year at the then-current subscription price.
Offer applies only to new annual subscriptions, and is subject to change at any time. Void where prohibited.
If you choose a monthly subscription, you pay $34.95 per month. You will be notified if the current monthly rate of $34.95 changes at any time in the future.
TheStreet.com is a publisher. None of the contributors or their affiliates will provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. From time to time, any or all of the contributors or their affiliates may hold positions in securities mentioned and they may trade for their own accounts. In cases where the position is held at the time of publication, appropriate disclosure is made.
© TheStreet.com, Inc., 14 Wall Street, 15th Floor, New York, NY 10005.
|
