Monday, April 26, 2010

Is the S&P 500 at Fair Value?

The first chart shows the relative value of the S&P 500 as compared to nominal GDP (to be more specific... the S&P 500 index / nominal GDP in billions $$) since 1929.

And the importance of such a measure.... the ten year forward annualized change in the S&P 500 index vs. the starting S&P 500 to nominal GDP ratio since 1929.

The above has a remarkable 0.73 r-square.

Where are we now? Well, assuming the economy grew at the 3.2% annualized rate that has been forecasted for Q1, at current levels the S&P 500 is ~8.4% of nominal GDP (in billions $$).

Or just about at the 80 year average.

Source: BEA