July 21, 2009

THE UR CAN GUARANTEE HIS RE-ELECTION BY BAILING ON HIS AGENDA:

Stocks Are Far From Fair Value: Indicators show the economy turning around. (Brian S. Wesbury and Robert Stein, 07.21.09, Forbes)

To determine fair value for the stock market we use historical norms for the relationship between stock prices, interest rates and corporate profits. These norms suggest that with interest rates at current levels and corporate profits where they were in the first quarter of 2009, stocks today are at no more than 50% of fair value. Yes, that's right, stocks would have to roughly double from here to get to fair value.

That said, we are also forecasting higher interest rates as the economy grows robustly over the next 18 months and the inflation problem returns. But even using a 10-year Treasury yield of 5.5% suggests the stock market is at no more than 75% of fair value.

Despite this, it is unlikely that stock prices will quickly move all the way back to fair value. Investors have to remain concerned about the prospects for a huge expansion of government in the form of health care spending and regulation as well as limits on carbon emissions. But with each passing week, it appears more and more likely that our new president's legislative agenda on these issues is not going to be altogether successful.

Posted by Orrin Judd at July 21, 2009 6:57 AM
blog comments powered by Disqus
« A GUN VOTE WON'T COVER THE DEFICIT HE'S RUN UP: | Main | CHANGE IS BAD: »