The S&P 500 is out of whack. You could sell every single share in the index, buy back every company and its assets, and have more than a little pocket change to spare.
The so-called Q ratio — the stock value vs replacement value of a company’s assets — is unusually high. It’s only been higher during the Internet bubble and the 1929 market peak. Some investors are checking in with the ratio, invented by the late Nobel Prize-winnning economist James Tobin, reports Bloomberg. And they are saying oh-oh. At least one is pointing a finger of blame at quantitative easing:
“QE is a very dangerous policy, in my view, because it has pushed asset prices up and high asset prices, we know from history, are very dangerous,” Andrew Smithers, founder of Smithers & Co. in London, said in a phone interview. “It is very strongly indicated by reliable measures that we’re looking at a stock market which is something like 80 percent over-priced.”
The current bull market began in March 2009, and is now the second longest since 1956. But investment in plants and equipment hasn’t kept up with the boom of equity prices. Stocks are pricey, but arguably more attractive than competing asset classes.
The Q ratio is far from perfect. Famed stock market strategist Laszlo Biryini says its useless. Others agree:
“The issue we have with Tobin Q is that it does a very poor job at timing the market,” Jeffrey Rubin said from Westport, Connecticut. “The followers of Tobin Q never told us to buy in 2009, yet now we are warned that we should sell. Our response is sell what? We were never told to buy.”