NAMED AFTER RENOWNED economist James Tobin, Tobin’s Q compares the stock market’s total value to the value of corporate assets. This might sound suspiciously like price-to-book value. But book value reflects the value at which assets are carried on a corporation’s books, while Tobin’s Q looks at corporate assets using current values.
This number is available every three months, compliments of the Federal Reserve. The easiest way to track Tobin’s Q is to head to the Federal Reserve Bank of St. Louis, which provides a regularly updated chart.
If stocks are trading above the value of corporate assets, that suggests U.S. shares are overvalued, because stock investors are effectively purchasing corporations for more than the value of their assets. Analysts, however, don’t just pay attention to the absolute number. They also look at how today’s ratio compares to its historical ratio. Historically, stocks have—on average—traded at a discount to the value of corporate assets.
Tobin’s Q shouldn’t be used as a short-term trading signal. As with the Shiller P/E, Tobin’s Q often indicates that stocks are overvalued. That suggests that perhaps the Fed is undervaluing corporate assets or that average valuations have moved into a permanently higher range. If it’s the latter, that’s a mixed blessing: 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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