**Understanding Brock Value charts**

Brock Value is the long-sought answer to the question: what is the market worth? BV is a valuation metric with just two inputs: GDP and interest rates. Compared to questionable old-school metrics (and even new ones like Shiller’s CAPE), BV provides more reliable measurements, especially at critical turning points.

Valuation | Return |
---|---|

Above Red Line | 1.2% |

Fair Value | 7.2% |

Below Green Line | 10.5% |

Median 10-year compound annual real total returns, 1919-2006 |

The red and green lines found on most of the BV charts on this site indicate the normal range of the market. Measuring one-third of a standard deviation above and below BV (the white line), these guidelines serve as boundaries, beyond which valuation is extreme in one direction or the other. When the market (the yellow line) trades above the red line, it is overvalued. When this happens, my analysis shows that prospective (ten-year) returns are lower than average. Conversely, when the market trades below the green line, it is undervalued and ten-year returns are higher than average.

Your Brock Value Charts are great — please keep them going.

Thanks for the good word, John. I will keep this site going until kingdom come.

Oh my dear God who dreamt up this baloney? The long term trend line for the S&P 500 index is around 400 at the very most. This makes the S&P 500 index 500 percent overvalued today. Given the strife and outlook for the future a value of 400 is still excessive. I could add the long term trend line for the DOW is around 3,500 while I’m at it.

Tony, this forty-year trend channel suggests the market is ahead of itself but I don’t see how you got 400.

hi peter, the gdp only comes out quaterly so today is december 18, 2015 you would have to use third quarter gdp to get brock value , any suggestions

That’s correct. Because the new GDP numbers come out after the quarter is over, I carry forward the previous level. You could extrapolate the trend forward to produce a pro forma GDP, but I do not.

You can use the method with individual stocks?

Hi Emiliano,

Yes, you can, if you have access to enough historical data to calculate a representative median (ten years is enough). Use the price to sales ratio. You can get the sales data from ValueLine.

Thanks Peter (also follow you on twitter). I’ll try ko and pg

mr. brock, can you please provide the website link to obtain the gdp and bond yield for the data you use, thanks

My sources (with links) can be found in the spreadsheet, on the fourth tab labeled so.

hi peter, i am able to calculate pyi ratio and it matches the values you obtain, but when i calculate the brock value using the pyi ratio, the brock value becomes the current s&p 500 value there is no difference, please help

Hi Stefan,

If you are getting errors, check your formula against the formula in the data table. That should show you what’s wrong.

Using the latest figures (November 27,2015)

BV = (0.515/Aaa)*GDP

BV = (0.515/4.01)*18034.8

BV = 2316.19

Hi Peter,

Not sure how I came across your site, but I found it fascinating. So many people look at stock index levels as if they were disconnected from the real world, but of course values must relate to economic output somehow. Bravo!

I am having trouble imagining what meaning the PYi number means though. P/y is already normalizing the index’s price by economic output. Now you write that you are standardizing by Aaa bond rates. How do you conceive of that?

To me, the simplified version is more defensible mathematically. You’re basically doing a Gordon Growth Model equation where PV = GDP / (r-g). Right now, the r-g term is around 8%, so if you assume a 5% nominal growth in the future, you are “discounting” the GDP at a rate of 13%. That seems very high to me but at least the path to get there makes sense.

Can you help me understand the PYi?

Thanks much,

Erik

Hi Erik,

However you found this site, I am glad you did, because you left a great comment. I wish I could take credit for factoring in interest rates. It is a stroke of genius. However, a real genius came up with it in the 1970s when his valuation formula stopped working. It was an era of rising inflation and unheard-of interest rates, so Ben Graham realized he needed to divide his ratio by the Aaa rate to normalize it. How I came upon his idea and started using it in my own stock analysis is detailed here.

From the man himself in 1974, why interest rates are required in fair value calculations.

Hello Mr. Brock,

How were you able to create a “forty-year trend channel” or what source did you use? Thank you for your commentary and website.

Very Respectfully,

John

Tony, this forty-year trend channel suggests the market is ahead of itself but I don’t see how you got 400.

Hi John,

I’m glad you asked. That particular chart was made at Free Stock Charts, a site from the Wordens and the best charting tool for my needs.

To make a decades-long chart I use monthly or quarterly data. There’s 54 years of quarterly SPX data available. I set a log scale on the y-axis and use the trendline tool to draw the channel lines.