文档介绍：Equity
Global Research
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- Introduction -
I. Fed’s Stock Valuation Model
How can we judge whether stock prices are too high, too low, or just right? The purpose of
this weekly report is to track a stock valuation model that attempts to answer this question.
While the model is very simple, it has been quite accurate and can also be used as a stocks-
versus-bonds asset allocation tool. I started to study the model in 1997, after reading that the
folks at the Federal Reserve have been using it. If it is good enough for them, it’s good
enough for me. I dubbed it the Fed’s Stock Valuation Model (FSVM), though no one at the
Fed ever officially endorsed it.
On December 5, 1996, Alan Greenspan, Chairman of the Federal Reserve Board, famously
worried out loud for the first time about “irrational exuberance” in the stock market. He
didn’t actually say that stock prices were too high. Rather he asked the question: “But how
do we know when irrational exuberance has unduly escalated asset values, which then
e subject to unexpected and prolonged contractions….”1 He did it again on February
26, He probably instructed his staff to devise a stock market valuation model to help
him evaluate the extent of the market’s exuberance. Apparently, they did so and it was made
public, though buried, in the Fed’s ary Policy Report to the Congress, which
panied Mr. Greenspan’s Humphrey-Hawkins testimony on July 22,
The Fed model was summed up in one paragraph and one chart on page 24 o