NPR’s Day To Day was kind enough to have me on this afternoon to discuss a post I wrote over the weekend: After All That, Stock Market Back To Fair Value. The key point I made–that after 15 years of being overvalued, stocks have finally regressed to the long-term mean–is easier to make with a chart, so I’ve included it below.
What you are looking at is strategist Andrew Smithers’ assessment of the S&P 500’s value over the past century via two measures:
- Cyclically Adjusted Price Earnings (CAPE), which “smooths” long-term earning growth to adjust for the business cycle, and
- “Tobin’s Q,” which is a measure of replacement value.
As I explained to NPR host Madeleine Brand, who used to live in Clinton Hill, Brooklyn and now lives in Culver City, CA (the cool things you learn through the headphones pre-interview), the chart demonstrates that stocks are now trading close to their long-term average value. That’s good news for long-term investors, who can now reasonably expect to receive an average long-term return (9%-10%).
This doesn’t mean the market won’t go lower in the interim. In fact, given the rate of deterioration of the economy, it probably will. It just means that, if your long-term asset allocation model calls for you to keep adding money to stocks, you should feel comfortable doing so. Stocks are priced to produce a much higher return today than they were 10 years ago, at the most recent peak in that chart.
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