THE TOBIN’S Q FACTOR NET ASSETS OF PUBLIC COMPANIES ON THE DOW MARKET MEANS THE STOCK MARKET CAN WITH HISTORICAL NUMBERS FROM THE PAST 100 YEARS WOULD DECLINE FROM A Q OF 70% WOULD MEAN DOWN TO 12,000, OR A Q OF 57% MEANS DOWN WITH THE MARKET TO 9,500, AND A Q OF 30% MEANS DOWN WITH THE MARKET ALL THE WAY TO 5,000

……As stock market historian Russell Napier points out in his book “Anatomy of the Bear,” on five occasions in the past 100 years — in 1921, 1932, 1949, 1974 and 1982 — those big downward moves have not ended until share valuations have fallen to just 30% of the replacement cost of company assets. That’s using a powerful, if little-known, economic metric known as Tobin’s q.

And, to cut to the chase, if Wall Street stocks followed the same path today that would take the Dow down to about 5,000, and the S&P 500 Index all the way down to around 600. (The S&P 500 slumped more than 3% to 1,971 on Friday.)

Yikes.

The “q” is a valuation that they don’t even mention in the training manuals for the official “financial planner” and financial-analyst exams. Your money manager has probably never heard of it. Or, if he has, he probably ranks it with astrology and the mystic rantings of Nostradamus.

But the “q” happens to have by far the most successful long-term track record of any stock market indicator.

It’s been better than the price-to-earnings ratio or quarterly earnings forecasts or economic growth rates or long-term interest rates or Federal Reserve minutes.

Independent analysts — such as professor Stephen Wright at London University and Andrew Smithers at Smithers & Co., a financial consultancy in London — have tracked it back over 100 years.

And in the past there has been no better guide for the long-term investor. It’s been even better than the cyclically adjusted price-to-earnings measure, also known as the “Shiller PE” after Yale finance professor Robert Shiller (which also, incidentally, suggests U.S. stocks could plunge a long way from here).

The “q” looks at the net asset values of public companies and adjusts them for inflation. It makes some intuitive sense. Why would Widget Inc. be valued at $1 billion on the stock market if you could start the company from scratch for a lot less?

Right now, according to data from the U.S. Federal Reserve, the reading on the “q” is about 100%. (It was 106% at the last reading, on March 1, but since then the S&P 500 has fallen by about 6%.)

Since World War II, the average “q” reading has been about 70%. So if Wall Street tumbled just to its modern average valuation, that would take the Dow Jones Industrial Average down to about 12,000.

If we just look at the period 1949 to 1994 — in other words, before the gigantic, off-the-charts boom of the late 1990s — the historic average “q” reading for stocks was 57%. If the market falls to those levels, that would take the Dow to about 9,500.

And if the market fell to its historic bear market lows, namely 30% or so, that would mean a Dow of about 5,000.

http://www.marketwatch.com/story/dow-5000-yes-it-could-happen-2015-08-21?page=2