The hard truth is the “fundamental” fair value of stocks is whatever it’s priced at. It doesn’t matter that famous money manager, Stanley Drukenmiller, says the stock market is the most overvalued he’s ever seen it and the idea of a V-shaped recovery is “a fantasy.”
Stock Prices & GDP
If you wanted to predict what the long-run fair value and return on stocks will be you could estimate GDP and then extrapolate. You would also learn whether stocks were over or undervalued. GDP is just the factor that another famous money manager, Mr. Buffett, uses to value the market. This diagram illustrates the relationship.
The Weekly Economic Index (WEI)
To help get a more sensitive view of where the economy is headed the NY Fed recently created The Weekly Economic Index (WEI).
“The WEI is an index of ten daily and weekly indicators of real economic activity scaled to align with the four-quarter GDP growth rate.”
This week the WEI registered at negative 11.14, it’s lowest since it was first published. The following table gives you an idea of its path along with its scale in recent months and against the Great Recession.
S&P 500 – Fair Value
Using this week’s WEI, the S&P 500 is approximately 27% overvalued, the fair value is approximately 2,050.