The Q-Ratio

The Q-ratio is a method of estimating the fair value of the stock market. It's defined as the total price of the market divided by the replacement cost of all its companies.

The concept was originally developed by economist James Tobin (also referred to as Tobin's Q). More recently, it's been advocated by Andrew Smithers and Stephen Wright in their prescient book Valuing Wall Street (Amazon reviews).

This page is an attempt to independently recreate the Q graphs from the raw data.

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The Method

The data from which q is calculated are published in the "Flow of Funds Accounts of the United States Z1", which is published quarterly by the Federal Reserve. This data source is available from 1952 onwards.
Smithers & Co.

We're using the Z1 Flow of Funds report from the Federal Reserve, as indicated.

As of 2015, the location of the relevant data has changed. For the total market price, we're now using B.103 line 39 (market value of equities outstanding). And for the replacement cost, we're using B.103 line 36 (net worth). The associated codes are LM103164103.Q and FL102090005.Q, respectively.

The underlying data we used is available here. Note that what we're graphing is actually the value of Q relative to its historical average (currently 0.6576).

The results closely match those of Andrew Smithers. The difference in valuation (currently we're showing the market as being 12% less expensive than Smithers) appears to be due solely to the average Q values being used. Smithers' graphs incorporate significantly more data, going back to 1900, and captures the extended period of undervaluation early in the previous century. As of this writing, therefore, Smithers' average Q value is 0.615 whereas ours is 0.657. If we substitute Smithers' figure, the valuations match exactly.

Additional Resources on Q: