What is a fair market price?

Some experts think many factors justify significantly higher valuations than historical norms.

Yan Barcelo 4 July, 2018 | 5:00PM

By historical standards, stocks are overvalued, hovering near their second-highest price level ever. Recently, the Shiller cyclically adjusted price-to-earnings (CAPE) ratio stood at 33 for the S&P 500 Index, double its historical average of 16. That doesn't bode well for stocks if that ratio starts to move back toward its long-term norm.

However, many serious commentators consider that the market, though somewhat overvalued, certainly does not float on a bubble. "Yes, the American stock market is expensive, maybe 20% above its normal value," considers Raymond Kerzérho, director of research at PWL Capital in Montreal. "But other developed regions are not overvalued. Canada is at 24 times earnings, Europe at 22 times, Asia-Pacific at 20 times."

Kerzérho and others think that many factors justify valuations significantly higher than the historical norm. The most obvious factors are interest rates, which are currently at historical lows, and inflation. Vanguard has devised a "fair value" CAPE that takes into consideration these factors and which arrives at a much lower market valuation than what the Shiller CAPE establishes, which is based only on past inflation. Vanguard claims that, since 1990, its CAPE is much better than Shiller's at predicting future returns.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc3,059.09 USD-2.23
Apple Inc110.07 USD-1.56
Netflix Inc482.16 USD-1.84
Tesla Inc391.75 USD-7.66
Twitter Inc46.08 USD7.84

About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, writing for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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