One Way to Solve the Stock Market's Valuation Puzzle
Author: Steve H. Hanke and Matt Sekerke
Outlet: National Review
Date: April 13, 2023
Is the stock market over- or undervalued? Answering that question, Hanke and Sekerke note, seems hopelessly complicated when approached through the usual thicket of earnings multiples, discount rates, and equity risk premia. They offer a simpler monetary lens: equity prices are quoted in dollars, so the quantity of money in the economy is a first-order determinant of the level of asset prices. Measuring the market against the stock of broad money—rather than against earnings alone—cuts through the valuation puzzle and explains why the great asset-price surge of 2020–21 accompanied an explosion in the money supply, and why the subsequent monetary contraction pointed toward a difficult stretch for equities.
Full Citation:
"One Way to Solve the Stock Market's Valuation Puzzle," National Review, April 13, 2023 (with Matt Sekerke).
Co-authors: Matt Sekerke