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Sept. 6, 2011, 12:05 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Is the stock market undervalued?
That question, crucial at any time, takes on added urgency in light of the test of the August lows that the market appears to be setting up for itself in coming days "” perhaps even as early as this week. How much support can the market count on from valuations?
You may recall that I last addressed the market's valuation almost exactly three months ago. I concluded then that "it's hard to slice and dice the data in a way that shows stocks to be undervalued." ( Read my Jun. 3 column about the stock market's P/E ratio. )
/quotes/zigman/3870025 SPX 1,173.97, -30.45, -2.53%
But that was then; this is now. The S&P 500 index going into this week was 11% lower today than where it stood three months ago. At its August low, it was 15% lower. Surely that's enough to swing stocks into the undervalued column?
You be the judge.
Let's start with the P/E for the S&P 500 index /quotes/zigman/3870025 SPX -2.53% when calculated using trailing 12-month "as-reported earnings" (through June 30). It currently is 14.0, which is about 10% below the long-term average for this ratio back to 1871 "” which is 15.5, according to data supplied by Yale University finance professor Robert Shiller.
Furthermore, the market appears to be even more undervalued if we focus on just the last 50 years. Many on Wall Street argue that the more recent decades are more relevant than the longer-ago history, and the average P/E over the last 50 years, according to the Shiller data, is 19.0. In comparison to that 50-year average, the current market is 26% undervalued.
Both of these data points should provide at least some comfort to the bulls.
Let's next focus on the P/E ratio when calculated using estimated earnings over the next 12 months. According to Standard & Poor's, "as-reported" earnings per share for the S&P 500 over next four quarters are estimated to total $93.75 "” which translates into a P/E of 12.5.
Note carefully, however, that it would be inappropriate to compare this 12.5 to the historical average of P/Es based on trailing earnings. That's because forward-looking P/Es are always lower than trailing-looking P/Es. The only historical data I know of for benchmarking the current forward-looking P/E is a study conducted several years ago by Cliff Asness, a managing principal at AQR Capital Management, and Anne Casscells, the chief investment officer at Aetos Capital (both hedge fund firms).
They calculated that the median forward-looking P/E between 1976 and 2003 was 12.1. In comparison to that, the current market is 3% overvalued "” a low enough number to classify the market's valuation as neither over- nor undervalued.
Not quite as bullish a picture as painted by the P/E ratio based on trailing earnings. Still, it still would appear as though the stock market over the last three months has worked off its overvaluation. And it's possible to argue that stocks are significantly undervalued.
/quotes/zigman/3870025 Add SPX to portfolio SPX S&P 500 Index 1,173.97 -30.45 -2.53% Volume: 0.00 Sept. 2, 2011 5:15p var embeddedchart124732823Chart = new EmbeddedChart('#embeddedchart124732823', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SPX'); jQuery.data($('#embeddedchart124732823').get(0), 'embeddedchart', embeddedchart124732823Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 var OB_permalink= 'http://www.marketwatch.com/story/are-stocks-undervalued-2011-09-06'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 13 Comments Most Popular Dow headed below 10,000 as cyclical bear begins 1. Slide Show The 10 best places to live in the U.S. 2. Mark Hulbert Are stocks undervalued? 3. Paul B. Farrell Occupy Wall Street will lay siege to U.S. greed 4. Market Snapshot U.S. stocks face down Europe's issues 5. Join the Conversation 13 Comments 1,000 characters My comments... Community guidelines » Add Comment Breaking Insight Mark Hulbert Are stocks undervalued? Irwin Kellner On jobs, better late than never Paul B. Farrell Occupy Wall Street will lay siege to U.S. greed Mark Hulbert Why it's still too volatile to safely enter market Find a Broker Partner Center » Video Juniper Networks Shares Knocked Back Netflix Swings Wildly, But Keeps Barrelling Ahead Travelzoo, On Cloud Nine, Suddenly Loses Altitude WebMD Catches Flu from Bears About Mark Hulbert RSS News feedMark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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