Tobin's Q ratio is defined aggregate market cap divided by the aggregate (net) value of all listed companies' assets; it can be calculated based on figures from the US financial accounts. From 1900 to the 1990s, it was clearly mean reverting, and probably* the best valuation metric available, for a horizon longer than several years. Since then, it's less clear, as the
chart in the article shows.
tldr; the US stock market remains 58-73% overvalued, provided there hasn't been a shift in the mean q ratio.
*probably because it depends on economic data that's subject to revision; AFAIK nobody has prepared charts for the Q ratio that include all the releases. There could be noise in the early releases that make it less useful than longer charts, based on final releases, suggest.
Leave a Reply