Henry Blodget
Jun. 17, 2010, 7:04 AM
We've been pointing out for a while that, based on a cyclically adjusted PE ratio, the stock market is significantly overvalued--say, 20% or so.
To arrive at this view, we use a "fair value" estimate for the S&P 500 of about 900, which is close to the one used by fund manager Jeremy Grantham, fund manager John Hussman, and others. This compares to the S&P's current level of about 1100.
But now Andrew Smithers, an excellent economist based in London, is telling us that we're way too optimistic, that fair value for the S&P 500 is actually in the 700-750 range. Smithers, therefore, thinks the stock market is about 50% overvalued.
Smithers constructs his estimate in two ways: 1) the same cyclically adjusted PE ratio that we use, and 2) something called "Tobin's Q," which is a measure of replacement value. Like Yale professor Robert Shiller, Smithers charts these valuation measures for the last century, which provides some context for where we are today:
[snip]
The DJIA is down 16 as I post.
Stocks that halve, will halve again. I’m not thinking 3200, but a visit to 6400 again could be in the cards again.