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May 18, 2015 04:00 pm

Stock Market Valuation Exceeds Its Components' Actual Value

An anonymous reader writes: James Tobin, a Nobel Prize-winning economist, developed a concept called "Q-value" — it's the ratio between two numbers: 1) the sum of all publicly-traded companies' stock valuations and 2) the value of all these companies' actual assets, if they were sold. Bloomberg reports that the continued strength of the stock market has now caused that ratio to go over 1 — in other words, the market values companies about 10% higher than the sum of their actual assets. The Q value is now at its highest point since the Dot-com bubble. Similar peaks in the past hundred years have all been quickly followed by crashes. Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.

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