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Tobin’s Q Valuation Update: Bear Market Not Finished at Trader’s Narrative

Valuing Wall Street by Andrew SmithersLast month we looked at a simple method for valuing the market called Tobin’s Q. (To get details, check the previous link).

Working with the available data we had back then we surmised that the market had gotten much cheaper but that it was still not quiet at a level which had historically marked bear market bottoms. But using the forward estimate of a Q ratio expert (the most preeminent disciple of Tobin) we were expecting to find a flush down in the first quarter of 2009 taking us down to that level.

The Federal Reserve released its data for the first quarter of 2009 and unfortunately the estimate by John Mihaljevic was not borne out. This bear market is not finished - at least not according to Tobin’s Q ratio.

I’m not really sure how the eggheads at the Fed actually crunch the numbers for the numerator and the denominator but adjustments are the norm. Each quarter we not only have new data but usually small adjustments are made to prior numbers.

This most recent data release was no different with almost all previous data points changing slightly. For example, the 2008 fourth quarter data changed from 0.6208 to 0.6730. The only (thin) silver lining in this cloud is that we are continuing to head in the right direction: lower. But in order to give us a signal, the ratio has to fall precipitously to the 0.40 level. Which is not to say that it can’t do so.

In the first quarter of 1974 the Q ratio was 0.58, not far from where we find it now. During the next few quarters, it fell so fast that by the fourth quarter of 1974 it was 0.33 - at an extreme historic low, signaling a generational opportunity in the equity markets. You can mouse over the chart below to see what I mean.

By the way, if you haven’t yet, I highly recommend picking up a copy of Valuing Wall Street. It is the definitive book on this indicator and at only $10 even a cheap bastard like me can’t resist it. A little trivia: this book came out at the same time as “Irrational Exhuberance” but either because it had a useless publicist or because the concept was too dry, it never got the same traction as Prof. Shiller’s book - even though it argued correctly that the 2000 market was about to take a massive tumble.

You can get the most recent data as well as the archived files at this Federal Reserve page.

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11 Responses to “Tobin’s Q Valuation Update: Bear Market Not Finished”  

  1. 1 Mark

    didn’t the Coppock give a long-term buy signal?

    Hard to do positioning given the plethora of noise.

  2. 2 graphseo

    maybe the bear market isn’t over but if you look at the chart closely, you have a down trend and 3 months ago lows have been supported by that trend. also you have a big horizontal support near 0.6/0.65 on this ratio. In the long run we might not be out of the bear market indeed, but in short term we have hell of support here !

  3. 3 Q

    Great post per usual… I’m just curious, what does John Mihaljevic’s estimate of the Q ratio say with the revised data? It seems he was significantly closer to a buy at 0.43 from the previous post and also significantly off from the Fed’s estimate of .62 at the time….

    Thank you.

  4. 4 dacian


    Can you tell where from do you take the Tobin’s Q ratio? Is it updated weekly or monthly? Do you calculate that by yourself? I don’t have any knowledge with this indicator. thanks

  5. 5 papa

    Good point, Mark. I thought Coppock was the “final piece of the puzzle” for confirming a new bull. Are there more pieces or is this a new puzzle?

  6. 6 Babak

    dacian, I provide links and info on how to calculate Q in this (above) post and in the previous one.

  7. 7 wayne

    Hard to compare 2008-9 with 70’s In 72-82, stocks sold at book value because you could get double digit returns on 1 year tbills. Why own a stock?

    Most all valuation models now show the 50’s as an incredible buying opportunity with interest rates at 2% and earnings yields at 10%.

    We may eventually get to 0.4 on the Q Ratio, but you may miss a monster bear mkt rally over next two years waiting for stimulus to exhaust itself and inflation to kick in.

    Valuation models are usually traps for traders. For example, in retrospect the market was way overvalued from 95 to peak in 2000, but the mkt doubled regardless.

    Also mkt was extremely underpriced in early 74 about half way down the 50% decline. Value is not nearly as important as Cash. Money makes the mare run

  8. 8 dacian

    wayne, it’s interesting what you’re saying. Can you develop or give 1/2 links to support your statments?

    “We may eventually get to 0.4 on the Q Ratio, but you may miss a monster bear mkt rally over next two years waiting for stimulus to exhaust itself and inflation to kick in. ”

    How high the rally then and how do you know the stimulus will work for 2 years? thanks

  9. 9 Wayne


    It’s monday morning, I just read your note. I have no links to offer you but one In Marty Zweig’s book “Winning On Wall Street’, he has a chapter, titled “Don’t fight the Fed”, with some charts that you might find applicable

    Let me offer you some other food for thought.

    Reasons that the Market May Surprise to the Upside

    1. First and foremost, as I have alluded too, the Federal Reserve has a history of turning markets when attempting to stimulate the economy and we have just experienced the greatest global stimulus package in history. Although massive borrowing has some negative longterm implications, for the shortterm, it is very conducive to gains in equities.

    2. On March 23, 1992, we had a ten day period where advances lead declines by more than 2/1 suggesting that this rally has legs. This was the first such occurrence since 1992, but these have a 95% record of predicting positive years since 1950

    3. Leading Economic indicators were up solidly in both April and May, suggesting that the economy should be improving and that very possibly recession is over for now. These were the first back to back gains since Sept of 2006 and they were solid gains.. Stronger Commodity prices suggest demand for goods as well.

    4. S&P (918.90) is above 200 day moving average (898.35) which is important to many market timers. Coppock Curve model positive as well.

    5. Even after the 40% rally, there is still near record levels of cash on sidelines.

    6. Note that in the last two weeks, as the market has traded sideways, sentiment polls, went from neutral to decidedly bearish, indicating that the market has the ability to climb a wall of worry in current environment. The market tends to fool as many people as possible and the move that would surprise the most people right here is straight up.

  10. 10 dacian


    I have my doubts on some points (1 and 5) I do agree or don’t know some others (2, 3 and 4) while for some others I have different measures (6).

    And because we talk a lot about sentiment here, here is a definition of “smart money” and “dumb money”

    As you can see, by that definition, “dumb money” is extremely bullish with prices going nowhere; this is typically bearish. I know it takes bulls to make a bull, but “dumb money” were wrong so many times…

    thanks for your answer btw and have a great week!

  11. 11 Wayne


    Thoughts on Sentiment

    Looking at the three sentiment polls listed in Barrons. Although the % of bears is nowhere near the Feb levels, I noticed that it didn’t take much of a pullback over the last 2 weeks to turn a lot of people bearish. This suggest to me, that it would probably be difficult for the market to have a 20% correction at this time, given the mkt participants propensity to turn defensive.

    last 2 wks 3 wks
    wk ago ago
    Consensus Inc 49 56 58
    AAII 36.4 41.8 50.0 (bulls/(bulls bears)
    MV 42 43 44

    As I mentioned in previous comment, mkt does what it can to fool the most and it would be interesting to take a poll of number of mkt participants that think the market can finish the year up 20% vs the number who think it can finish the year down 20%.

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