V.16:3 (122-126): How Has The Stock Market Priced Itself? by Gordon W. Neal

V.16:3 (122-126): How Has The Stock Market Priced Itself? by Gordon W. Neal
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How Has The Stock Market Priced Itself? by Gordon W. Neal

Here's a statistical view of the stock market using the Standard & Poor's 500 as the basis for analysis, and a collection of fundamental influences.

Assessing whether the overall market is priced right is a goal of most investors. To do so, we can look at ways that the market has valued itself in the past, and there is plenty of data available. The Standard & Poor’s 500 stock index is a good base, since it is a gauge of general market performance going back several decades. There are, besides earnings and dividends, other recognized market influences. Some are:

• Interest rates: These affect stock prices in at least two ways: First, by altering the return from financial instruments that compete with common stocks, and second, by changing the cost of funds needed to conduct business. Rising rates depress stock prices.

• Cost inflation: This can increase the dollar value of earnings over the long term, but also raises borrowing and other costs. Usually negative, particularly in the short term.

• Book value of stock: Book value may have some influence on prices.

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