Two leading economic writers opine in Forbes magazine say that stocks are at "no more than 50 percent" of fair value — mean the market would have to double from today's trading price to get there.
Brian S. Wesbury and Robert Stein, columnist for Forbes, write that to determine fair value for the stock market, an investor must use historical norms to discern the relationship between stock prices, interest rates, and corporate profits.
"These norms suggest that with interest rates at current levels and corporate profits where they were in the first quarter of 2009, stocks today are at no more than 50 percent of fair value. Yes, that's right, stocks would have to roughly double from here to get to fair value," they write.
That said, the economists are forecasting higher interest rates as the economy grows robustly over the next 18 months and the inflation problem returns.
"But even using a 10-year Treasury yield of 5.5 percent suggests the stock market is at no more than 75 percent of fair value," they write.
It is unlikely that stock prices will quickly move all the way back to fair value soon.
Investors are worried about the prospects for a huge expansion of government in the form of Obama's statist health care plans and oppressive regulation as well as limits on carbon emissions.
"But with each passing week, it appears more and more likely that our new president's legislative agenda on these issues is not going to be altogether successful," Stein and Wesbury write.
They forecast that the Dow will finish the year at 10,000, but with investors knowing all the risks.
"This rally will not be over until some short-only hedge funds go bankrupt. As a result, a sharp upward run to new highs is likely at any time," write Stein and Wesbury.
Others seem to agree.
Vito J. Racanelli, a columnist for Barron's magazine, writes that "in the stock market, the waders might soon be getting in, setting up a new, if only temporary, leg up for stock prices."
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