Fair Value on the Nasdaq?
Instead of looking at P/Es, P/Ss, etc., I decided to look at the price of the Nasdaq stock index before the market mania started to kick in during 1995.
I made an assumption that the average annual expected return for the Nasdaq index should be 11%, consistent with the average annual return in the Dow over its much longer history.
Crudely assuming that the Nasdaq was fairly valued before 1995, I made a yearly tally of the Nasdaq value on this date, the first trading day of March at the close, from the period starting in 1985(first March for the Nasdaq) to 1994, along with the extrapolated value based on a +11% return/year for the years up to now.
Here are the results for 1st day of March, closing value:
Date Value Extrapolated Value for 2001
3/85: 287.20 1525.29
3/86: 359.80 1721.50
3/87: 423.90 1827.20
3/88: 367.30 1426.33
3/89: 399.80 1398.68
3/90: 427.20 1346.43
3/91: 456.70 1296.76
3/92: 635.47 1625.56
3/93: 669.51 1542.91
3/94: 788.64 1637.34
Range 2001 Extrapolat. "Fair Value": 1296.76 - 1827.20
Median 2001 Extrapolat."Fair Value": 1534.10
Mean 2001 Extrapolated"Fair Value": 1534.80
Based on these experimental results, the fair value on the Nasdaq is around 1534. Which means another 30% haircut on the Nasdaq to get to these levels.
However, the Nasdaq is likely to bounce around, staying overvalued for a bit longer, as it takes time for things to settle down from a bubble, although clearly, the long-term trend from these levels both historically and over the past year is DOWN. |
