Valuation (Excerpt)

Stocks aren’t as cheap as they were during the summer of 2011, when the forward P/E of the S&P 500 fell to 10.4. It is now back up to 13.5. However, there is a widespread consensus among our accounts that stocks remain relatively cheap. I agree. That’s especially true now that several of the apocalyptic scenarios that weighed on valuation over the past three years seem less likely. Yet, at the same time, top Fed officials have explicitly stated that they intend to keep short-term rates near zero for a while even if the labor markets continue to improve.

What about Tobin’s q? It is a measure of the market value of an asset relative to its replacement cost. When values rise sharply relative to replacement cost that can signal a bubble as it did at the tail end of the 1990s bull market in technology stocks. For stocks, Tobin’s q peaked at a record high of 1.8 back then during Q1-2000. At the end of last year, it was just below 1.0 at 0.9.

Today's Morning Briefing: Eye of the Beholder. (1) Miami is hot again. (2) The bulldozers are working the night shift. (3) 50% down for out-of-towners. (4) Beauty and valuation contests. (5) The rise and fall of housing’s valuation multiple. (6) Affordability index has doubled. (7) Consensus is that stocks are cheap. (8) Professor Shiller disagrees. (9) Tobin’s q isn’t in bubble territory. (More for subscribers.)