Valuing whether the stock market is fair value can be done in a number of ways. Most commonly, the value of the index is compared to the earnings of the companies within it, to give an indication, known as the price to earnings ratio. The lower the price, the cheaper the market.
Using this method, the stocks that make up the FTSE 100 now look less attractive than at the start of the year – the p/e ratio is now 19, compared with 15 in January. To put that in context, the ratio's highest level was 30.5, reached in January 2000, at the peak 6930 peak of the market. While the US has reached above 41 , in the not too distant past.
The main US index in contrast, the S&P500, is slightly cheaper at 17 and German shares are at 18.
Another measure is to use "book value", what you'd get by selling all the assets of companies and deducting their debts and liabilities. Again, the lower, the better. The FTSE 100 book value is 1.88, according to Bloomberg, which is more expensive than Germany (1.65) but cheaper than the US (2.5).
Back in 2000 , the US market reached above ( 5 ) . This is why long term bullishness will remain , the order of the day .
For the smarter investor , Japan has a price to book value of only ( 1.52 ). Which is by far today`s best value index .
Good luck and May your Prophet go with you
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