Valuation of the Week #2: Valuing a Market (S&P 500)

The principles of valuation and the models that emanate from it can be used to value entire markets, not just companies. When you do this, you have to recognize the following:

  1. You are trying to be a market timer, not a stock selector, and if you believe your market valuations, they will affect your asset allocation decision, not your stock picking.
  2. It is far more difficult to win at the market timng game, because everyone does it and it is really difficult to develop an information edge.
  3. Market valuations are all about the macro variables: interest rates, the price of risk, the growth in the economy and how efficiently companies are delivering that growth.

This is a good time to be looking at market timing, because we are in the midst of a period where there is talk of bubbles, crises and central banking action. In fact, the fear of the Fed raising interest rates has animated many of the doomsday posts. You can start with my blog post, where I contest this argument. In the blog post, I also create a spreadsheet to do an intrinsic valuation of the S&P 500. If you are concerned or confused about all of the discussion about the market and whether it is due for a correction, try this spreadsheet out. I gave it my best shot, and with assumptions that I have little faith in, the value that I get for the index is about 10% lower than the current level. That lack of confidence reflects the fact that I am bringing little to the table other than guesswork and is one reason that I am not a market timer. When you are done, pleaseenter your "market" views into the shared Google spreadsheet.

Blog Posts

  1. The Fed, Interest Rates and Stock Prices (September 4, 2015)


  1. S&P 500 Intrinsic Value Spreadsheet

Google Shared Spreadsheet

  1. Your S&P 500 Intrinsic value