Monday, 5 April 2021

Tobin’s q for US stocks at twice historical average

The S&P 500 rose 1.1 percent last week, closing at a record high of 4,019.95.

With the continuing rally in US stocks, valuations are becoming more stretched.

Chris Dillow at Investors Chronicle noted last week that based on the latest figures from the Federal Reserve, the Tobin’s q, the ratio of share prices to the net worth of companies, was over 165 per cent for non-financial firms. That is twice the average since data began in 1952, and the second-highest level ever.

Dillow said that the Tobin’s q has predictive value for the stock market.

“High levels of Tobin’s q in 1969 and 2000 led to the S&P 500 falling in subsequent years and low ratios in the early 80s and in 2009 led to high returns on equities,” he wrote.

“A high q can therefore be a sign of irrational exuberance and therefore a predictor of falling prices,” he added.

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