Stock Market -- Fundamental at 2006-03-22 12:07:01
S&P 500: 1274
I use three different fundamentals - based models to track the SP500. All imply that from an empirical perspective the S&P is reasonably valued in the range of 1280 - 1300. I do not put too much stock in the predictive value of any of these approaches, but use them more as a diagnostic reference. Even then, I would not make too much out of divergences until they exceeded 6% or so. For me, the market looks reasonable enough now.
To summarize the output of the models, the market's rally since this past autumn reflects a continuation of above average earnings growth and an expanding p/e ratio to reflect a moderation of inflation pressure which in turn has been supported by a moderate easing of liquidity policy by the Fed as well as continued good growth of the SP500 dividend. The key changes in the mix since last October or so have been a step up in the growth of the monetary base and a reduction of inflation pressure stemming from lower fuels prices.
The risk premium of the market (earnings/price yield - 91 day T-Bill yield) is continuing to shrink from once very high levels. Thus, risk continues to rise, and it will be interesting to see how the market holds up if the Fed tacks on another 50 basis points to the FFR% over the next few months. Could be a character builder for investors.
