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Stock market valuation in the United States

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Author Info

  • Patrick Bisciari

    ()
    (National Bank of Belgium, Research Department)

  • Alain Durré

    ()
    (National Bank of Belgium, Research Department)

  • Alain Nyssens

    (National Bank of Belgium, Research Department)

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.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Document with number 41.

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Length: 77 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:nbb:docwpp:200311

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Keywords: stock market; financial market; united states; stock prices forecast;

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References

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  1. Paul Butzen & Catherine Fuss & Philip Vermeulen, 2002. "The impact of uncertainty on investment plans," Working Paper Research 24, National Bank of Belgium.
  2. Bisciari, P., 2001. "Nouvelle economie," Papers 14, Warwick - Development Economics Research Centre.
  3. Michele Cincera, 2003. "Financing constraints, fixed capital and R&D investment decisions of Belgian firms," ULB Institutional Repository 2013/883, ULB -- Universite Libre de Bruxelles.
  4. Quentin Wibaut, 2000. "Politique monétaire et prix des actifs: le cas des Etats-Unis," Working Paper Document 11, National Bank of Belgium.
  5. Philippe Jeanfils, 2000. "A model with explicit expectations for Belgium," Working Paper Research 04, National Bank of Belgium.
  6. John Vickers, 2000. "Monetary union and economic growth," Working Paper Research 10, National Bank of Belgium.
  7. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Series 0128, European Central Bank.
  8. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  9. Jeanfils, P., 2001. "A Guided Tour of the World of Rational Expectations Models and Optimal Policies," Papers 16, Warwick - Development Economics Research Centre.
  10. Charles Wyplosz, 2000. "Economic growth and the labor markets: Europe's challenge," Working Paper Research 08, National Bank of Belgium.
  11. Danny Cassimon & Peter-Jan Engelen & Hilde Meersman & Martine Van Wouwe, 2002. "Investment, uncertainty and irreversibility: evidence from belgian accounting data," Working Paper Research 23, National Bank of Belgium.
  12. Nyssens, A. & Butzen, P. & Bisciari, P., 2000. "Performances economiques des Etats-Unis dans les annees nonante," Papers 3, Warwick - Development Economics Research Centre.
  13. Paul R. Masson, 2000. "Fiscal Policy and Growth in the Context of European Integration," IMF Working Papers 00/133, International Monetary Fund.
  14. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105 Bank for International Settlements.
  15. Stephen Turnovsky, 2000. "Growth in an Open Economy: Some Recent Developments," Working Papers 0015, University of Washington, Department of Economics.
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Citations

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Cited by:
  1. Frédéric Lagneaux, 2008. "Economic Importance of Belgian Transport Logistics," Working Paper Document 125, National Bank of Belgium.
  2. Frédéric Lagneaux, 2004. "Importance économique du Port Autonome de Liège: rapport 2002," Working Paper Document 64, National Bank of Belgium.
  3. Olivier Blanchard & Jordi Gali, 2006. "A new Keynesian model with unemployment," Working Paper Research 92, National Bank of Belgium.
  4. Johan Devriese & Janet Mitchell, 2005. "Liquidity risk in securities settlement," Working Paper Research 72, National Bank of Belgium.
  5. François Coppens & David Vivet, 2006. "The single European electricity market: A long road to convergence," Working Paper Document 84, National Bank of Belgium.
  6. Alain Durré & Patrick Bisciari, 2005. "La bulle « Internet », un remake de la bulle de 1929 ?," Revue d'Économie Financière, Programme National Persée, vol. 81(4), pages 157-169.
  7. Nancy Masschelein, 2007. "Monitoring pro-cyclicality under the capital requirements directive : preliminary concepts for developing a framework," Working Paper Document 120, National Bank of Belgium.
  8. Frédéric Lagneaux, 2004. "Economic importance of the Flemish maritime ports: Report 2002," Working Paper Document 56, National Bank of Belgium.
  9. Frédéric Lagneaux, 2005. "Importance économique du Port Autonome de Liège: rapport 2003," Working Paper Document 75, National Bank of Belgium.
  10. Janet Mitchell, 2005. "Financial intermediation theory and implications for the sources of value in structured finance markets," Working Paper Document 71, National Bank of Belgium.
  11. Joachim Keller, 2008. "Agency problems in structured finance – a case study of European CLOs," Working Paper Document 137, National Bank of Belgium.
  12. Helga De Doncker, 2006. "Crédits aux particuliers - Analyse des données de la Centrale des Crédits aux Particuliers," Working Paper Document 78, National Bank of Belgium.
  13. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area : a summary of the Inflation Persistence Network evidence," Working Paper Research 95, National Bank of Belgium.
  14. A. Bruggeman & M. Hradisky & V. Périlleux, 2005. "Share prices, house prices and monetary policy," Economic Review, National Bank of Belgium, issue III, pages 65-78, September.
  15. Joseph Plasmans & Tomasz Michalak & Jorge Fornero, 2006. "Simulation, estimation and welfare implications of monetary policies in a 3-country NOEM model," Working Paper Research 94, National Bank of Belgium.

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