Tobin’s Q

NAMED AFTER RENOWNED economist James Tobin, Tobin’s Q compares the stock market’s total value to the value of corporate assets. This might sound suspiciously like price-to-book value. But book value reflects the value at which assets are carried on a corporation’s books, while Tobin’s Q looks at corporate assets using current values.

This number is available every three months, compliments of the Federal Reserve. The easiest way to track Tobin’s Q is to head to the Federal Reserve Bank of St. Louis, which provides a regularly updated chart.

The Fed’s fourth quarter 2023 report shows stocks trading 33% above the value of corporate assets, suggesting U.S. shares are overvalued, because stock investors are effectively purchasing corporations for more than the value of their assets.

Analysts, however, don’t pay much attention to the absolute number. Instead, they look at how today’s ratio compares to its historical ratio. On that score, things seem even more grim: Since 1952, stocks have traded at an average 21% discount to the value of corporate assets, versus the recent 33% premium.

Tobin’s Q shouldn’t be used as a short-term trading signal. As with the Shiller P/E, Tobin’s Q has indicated that stocks have been overvalued for much of the past three decades. That suggests that perhaps the Fed is undervaluing corporate assets or that average valuations have moved into a permanently higher range. If it’s the latter, that’s a mixed blessing: We may not get a big market decline—but, given today’s rich valuations, we also aren’t likely to enjoy impressive long-run gains.

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