Tobin’s Q

Jonathan Clements  |  March 10, 2016

THE FEDERAL RESERVE just released its latest “Financial Accounts of the United States”—which sent nerdy stock market analysts scrambling to look at table B. 103, which details the “Balance Sheet of Nonfinancial Corporate Business,” and especially line 44. That line compares the stock market’s overall value to the current value of assets owned by corporations. Some of these corporate assets are listed at their market price, while others are valued at their replacement cost.

In the latest Fed release, which reflects data for 2015’s fourth quarter, stocks were at 95% of the value of corporate assets. This is known as Tobin’s Q, named after famed economist James Tobin, who first proposed the measure. At first blush, the current reading suggests U.S. shares are cheap, because stock investors can effectively purchase corporations at a 5% discount to the value of their assets.

Analysts, however, don’t pay much attention to the absolute number, because the replacement values are likely overstated (or, to put it another way, companies could replace their current assets with assets of comparable condition for less than the stated replacement cost). Instead, analysts pay attention to how today’s ratio compares to the historical ratio. On that score, things don’t look so good: The latest reading of 95% is well above the historical average of 68%, which tells us that stocks are most likely overvalued. For a chart of Tobin’s Q over time, head to

None of this means that stocks are about to crash. Tobin’s Q shouldn’t be used as a short-term trading signal. Indeed, based on Tobin’s Q, stocks have been overvalued for much of the past quarter century, suggesting that perhaps average valuations have moved into a permanently higher range. If that has happened, it’s a mixed blessing, as I have emphasized before: We may not get a big market decline—but, given today’s rich valuations, we also aren’t likely to enjoy impressive long-run gains.

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