My bible on the subject of valuation is "Valuing Wall Street." The book presents a thorough argument that there are two valid methods for valuing the stock-market, the q ratio and cyclically-adjusted PE's. They also review and demolish the arguments for alternative methods. If I recall correctly, they are particularly scathing about the idea that a comparison with bond interest rates tells you anything at all. (I think this valuation method falls into the category of what they sarcastically refer to as "stock-broker economics," completely spurious arguments whose only purpose is to convince people to buy shares. At different times different "stock-broker economics" arguments are deployed for that purpose. In fairness, I will say that I have seen such arguments deployed in serious newspapers, such as the Financial Times.)
Cyclically-adjusted PE is saying shares are fairly valued. Somewhat worryingly, revised figures recently released by the US federal government have caused the authors of "Valuing Wall Street" to revise their q ratio estimate to put shares at still 30% overvalued. Obviously the two measures should agree, so there is a fair margin of error involved. Still, what's a 30% discrepancy, when seen against the backdrop that shares were heading toward 300% overvalued in 2000?
I always thought it was a scream where these cats use computers/spreadsheets and deep analysis to come up with 4% - which just happened to be close to old thirty year portfolio's div/interest aka SEC yield in modern speak.
