Statistics  |  MAR 1998

How Has The Stock Market Priced Itself? by Gordon W. Neal

How Has The Stock Market Priced Itself? by Gordon W. Neal Here's a statistical view of the stock market using the Standard & Poor's 500 as the basis for analysis, and a collection of fundamental influences. Assessing whether the overall market is priced right is a goal of most investors. To do so, we can look at ways that the market has valued itself in the past, and there is plenty of data available. The Standard & Poor’s 500 stock index is a good base, since it is a gauge of general market performance going back several decades. There are, besides earnings and dividends, other recognized market influences. Some are: • Interest rates: These affect stock prices in at least two ways: First, by altering the return from financial instruments that compete with common stocks, and second, by changing the cost of funds needed to conduct business. Rising rates depress stock prices. • Cost inflation: This can increase the dollar value of earnings over the long term, but also raises borrowing and other costs. Usually negative, particularly in the short term. • Book value of stock: Book value may have some influence on prices.

by Gordon W. Neal