Latest Q-Ratio indicating market getting closer to bottom
The most recent Fed flow of Funds report was just released – http://www.federalreserve.gov/releases/z1/Current/
We use this report to calculate the Q Ratio which is a measure of estimating fair value of the stock market. A figure of 1.0 is considered fair value. For a reference point, during the dot com bubble, the market was extremely overvalued. The q-ratio peaked at 1.8 in March of 2000. In times of extreme bear markets (1929,1974, 1982), the q-ratio reached and bottomed at .30
Based on the latest value of net worth (section B.102, line 32 ) and market value of equities (section B. 102, line 35) from the Flow of Funds report, the Q-Ratio at the end of Q4 2008 was .62. Since the end of 2008, the equity market has dropped a further 20%. Therefore, if you discount the market value of equities by a further 20%, the Q-Ratio drops to .50
We are getting very close to extremely low valuation levels but are still not yet there. This is not to say that we must get to .30 to ensure a market bottom. However, the economic conditions surrounding this bear market would suggesst that it should parallel the bear markets of 1932,1974 and 1982.