Stock Market Valuation in the United States

National Bank of Belgium Working Paper No. 41

77 Pages Posted: 14 Oct 2010

See all articles by Patrick Bisciari

Patrick Bisciari

National Bank of Belgium

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Alain Nyssens

National Bank of Belgium

Date Written: November 24, 2003

Abstract

This paper gives an overview of some issues related to market valuation, focusing on the developments on the New York equity markets. The 42.4 p.c. fall in the S&P 500 price index between 24 March 2000 - when it reached its all-time high - and 31 December 2002 is situated in a very long term perspective. It then appears that some bear markets were more pronounced in the past but that the bull market preceding the 2000-2002 bear market had been particularly long and impressive in extent. Given this sharp correction, we will discuss whether the S&P 500 was correctly valued at the end of 2002. To this end, we make use of valuation indicators defined as the ratio of the price to a fundamental. The fundamentals considered here are, according to the discount dividend model, annual earnings and, according to Q-theory, net worth. In December 2002, price-earnings (P/E) still showed a significant overvaluation of equity prices when compared to the historical average over the 1871-2002 period but, since July 2002, the overvaluation has not been significant in the case of Q. The evidence is even more mixed when the comparison is made, for each valuation indicator, with their average over the last 10 years. Simulations based on VAR models for P/E and Q were carried out to check whether, on two occasions, the S&P 500 in real terms climbed to a level perceived as irrational given past experience, implying that a correction had to be expected. These occasions were the so-called 1929 and 2000 bubbles. The models showed that, at some point in time before the peak in (real) stock prices was reached, the real S&P 500 exceeded the upper band of the 95 p.c. confidence intervals during both periods. For each of them, the Q model showed earlier and more persistent signals of significant overvaluation of stock prices than for the P/E model. Finally, in December 2002, both models indicated that the stock price had come back largely within the confidence interval.

Keywords: Stock Market, Financial Market, United States, Stock Prices Forecast

JEL Classification: G10, C32, C53

Suggested Citation

Bisciari, Patrick and Durre, Alain C. J. and Nyssens, Alain, Stock Market Valuation in the United States (November 24, 2003). National Bank of Belgium Working Paper No. 41, Available at SSRN: https://ssrn.com/abstract=1691649 or http://dx.doi.org/10.2139/ssrn.1691649

Patrick Bisciari (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

Alain Nyssens

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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