15 times $70 = 1050
1050 minus 10% = 945

This is the fair value math for the S&P 500. An appropriate P/E times a believable operating earnings number (12 months forward – mid 2010) minus an appropriate discount rate (stocks are, after all, a discounting mechanism). Of course, one can debate the inputs and the appropriate discounting time period, but the methodology is flawless. 

Embedded in the methodology are elements that should (but often don't) go beyond simple business cycle, industry, and company analysis. Factors such as:

• A new world economic order
• A new financial services business model
• The appropriate amount of government intervention

Factors that I will discuss at next Tuesday’s New York Society of Security Analysts “Market Forecast” luncheon. 

Unfortunately, these macro factors are not part of most investors’ toolkits. Beyond how such macro factors will impact the shape of the business cycle, big think subjects (such as, What economic philosophy will be the guiding force now that laissez-faire/cowboy capitalism is no longer the dominant principle?) have no way of being incorporated in your standard research methodology. Beyond the subjective aspects of such information, it is difficult to impossible for many investors to fit a new world economic order, for example, into your standard discounted cash flow model. Put differently, there’s no CAPM for the obvious yet out of the box factors that move economies and markets. Yet, they do matter. 

Investment Strategy Implications

By all accounts, stocks are more than fully valued. Only those with the rosiest of glasses can envision earnings and P/Es greater than those listed above. Then again, a return of animal spirits overriding the highly uncertain transitional macro elements noted above is not out of the question – especially with $3.5 trillion* still sitting in near zero percent money market funds. 

*A hefty 41% of the market value of the S&P 500