What "Fair Value" Method Works? - Real Time Insight

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As a big picture stock strategist, I grapple with one question more than any other. How do I determine what method works best to come up with a current fair value on the S&P 500?  This is always the biggest question on investor's minds. 

In your eyes, is this stock market fairly valued?

We have enjoyed a huge run-up in share prices the last few years.  Is this party over because the value of stocks got too high?  That is the wall of worry the market has been climbing the last few weeks. If the S&P 500 index comes to a point where investors say PRICES ARE TOO HIGH, stocks stall.

My sense of what accurately reflects 'fair value' is guided by the following four "back-of-the-envelope" methods to determine that 'fair value'.  

Read on to understand where I am coming from…

Recall that the Global High in Q3-2007 was 1565 for the S&P 500.

(1) Size Stock Price Fundamentals to the Nominal Growth of the U.S. Economy

Current Dollar U.S. GDP in Q3-2007               14.57 $US Trillion
Current Dollar U.S. GDP in Q3-2013               16.85 $US Trillion

+15.7% Change in Current Dollar GDP over the last six years.

§  1810 is fair value for the S&P 500 right now.

(2) Use a Proxy: Two Percent Real GDP Change Over Six Years.

2007 1565
2008 1596
2009 1628
2010 1661
2011 1694
2012 1728
2013 1762

§  1762 is fair value for the S&P 500 right now.


(3) Look Forward on 2014 Bottoms-Up S&P 500 Earnings.

Apply a 15 Forward Price/Earnings ratio to:

$121.9 dollars per share for S&P 500

§  1828 is fair value for the S&P 500 right now.


(4) Look Forward on 2014 Top-Down S&P 500 Earnings.

Apply a 15 Forward Price/Earnings Ratio to:

$118.2 dollars per share for S&P 500

§  1773 is fair value for the S&P 500 right now.


My Real Time Insight (RTI) questions:

(1) What method (shown above) works best for determining fair value on the S&P 500 stock index?

(2) In light of your answer, is this stock market fairly valued?



HALLMARK FINL (HALL): Free Stock Analysis Report

LADENBURG THALM (LTS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: HALL , LTS , PII , RTI

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