Q Ratio Indicates Stock Market Value Historically is Overpriced
Q Ratio Indicates Stock Market Value Historically is Overpriced. We use many indicators to analyze stock market value and future trends. One such popular indicator is the Q Ratio. It was developed by Nobel Laureate James Tobin to estimate the fair market value of the stock market for the long term. The ratio is the total price of the market divided by the replacement cost of all its companies.
As you can see from the chart below, present fair valuation is quite high at 1.79. Therefore, this suggesting the market is trading at 129% above the mean historic replacement cost, says Jill Mislinski of Advisor Perspectives. Note that the all-time Q Ratio high at the peak of the Tech Bubble was 2.17, about 180% above the historic average of replacement cost. The all-time lows in 1921, 1932 and 1982 were around 0.28, which is approximately 63% below replacement cost. Mislinski cautions this is not a short-term indicator. “Periods of over- and under-valuation can last for many years at a time,” she says. That means the Q Ratio is “ more appropriate for formulating expectations for long-term market performance”.