The stock market is undervalued according to Tobin’s Q:
‘Q’ is defined as the ratio of the market value of a firm to the replacement cost of its assets – in this case, we are estimating those figures for the entire industry. According to Nobel Laureate James Tobin, the ratio of total stock market value to the stock market’s net worth (corporate net worth) is a reliable indicator of market valuation. When the stock market trades at a ‘discount’ to the replacement cost of its assets, the market is inexpensive. This discount possesses ‘q’ ratios that are less than 1.0. Conversely, when ‘q’ exceeds 1.0, the market trades at a premium to its replacement cost. The run-up from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent (QI 09) level of 0.64 is the lowest since QII 91 – quite discounted. The long-term average (since 1952) for Tobin’s ‘q’ is 0.75.