Sunday, March 17, 2013

US Stock Market Valuation Measures (Excerpt)

Professor Robert Shiller, the man renowned for spotting irrational exuberance, is starting to warn that based on the valuation multiples he compiles, stocks aren’t cheap. However, his P/Es are controversial for all sorts of reasons including his use of 10-year trailing earnings to calculate them. I much prefer analysts’ consensus expected 52-week forward earnings based on a time-weighted average of their latest forecasts for the current and the coming years’ earnings estimates.

For the S&P 500, the forward P/E was at 13.5 on Friday. Monthly data show that the ratio of the forward P/E to consensus expected long-term earnings growth (which tends to have an upwards bias) was 1.26 during February. That’s about the same as the 1.21 average of this PEG ratio since 1985.

Another useful valuation measure is the ratio of the market value of all stocks traded in the US to nominal GDP. It is highly correlated with the market capitalization of the S&P 500 divided by S&P 500 revenues. Both of these measures have recovered from their lows of 2009, but remain well below their previous two cyclical peaks.

Today's Morning Briefing: Animal Spirits.  (1) East Coast to West Coast. (2) Keynes on human nature. (3) Keynes on steroids. (4) How will Fed deal with the animals? (5) No end to the endgame and no exit for the Fed? (6) Things could get tricky. (7) Greenspan’s famous question. (8) On the lookout for irrational exuberance. (9) S&P 500 PEG is at average. (10) Are sentiment indicators relevant if corporations are biggest buyers of stock? (11) No cause for exuberance in headline news. (12) The “Cyprus Moment.” (More for subscribers.)

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