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Economist: Tobin's Q Shows Market Could Still Be Attractive

Economist: Tobin's Q Shows Market Could Still Be Attractive

Tobin's Q, a measure of long-term stock market valuation, shows that equity markets through the end of 2015 were undervalued, according to Joseph Brusuelas, chief economist at RSM US LLP. This implies that the market could still be attractive for long-term investors.

As per the Q ratio, the combined market value of all the companies on the stock market should be about equal to their replacement costs. A market is deemed undervalued when the combined replacement costs of assets exceed the market value, and vice versa.

"For the first time in two years Tobin's Q implies that equity markets through the end of 2015 were undervalued relative to current pricing," Brusuelas told Benzinga.

This finding is one of the few bullish signals from the market that investors have observed since the start of volatility in domestic and global equity markets in August 2014.

Related Link: Diverging Global Interest Rates: Here's Why The Market Shouldn't Be Worried

"In our estimation this also supports our research findings that talk and fears of an imminent U.S. recession are overblown," Brusuelas said. "This data that we pull from the Federal Reserve's Flow of Funds data series and Robert Shiller's data on S&P 500 price earnings, given the declines in asset markets through the first three months of the year will almost surely indicate further value opportunities for investors and firm managers with longer time horizons."

Currently, S&P 500 futures were up 1.02 percent at 2,009.00, Dow futures gained 1.05 percent at 17,172.00 and Nasdaq futures advanced 1.15 percent at 4,334.25.

Image Credit: Public Domain


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