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The Tobin’s Q is a popular ratio to determine if the market is overvalued. It is calculated by dividing the market value of the U.S. stock market by its replacement cost. It computes how much investors are willing to pay for $1 of a company's cost to replace its assets. In theory, a market that is in equilibrium should have its market value equal its replacement cost with a Tobin’s Q ratio of 1. The current Tobin’s Q ratio is at an all time high of 1.926. The correlation with market volatility can be seen around peaks of this indicator and while it is useful to form an opinion on market valuation, this suggests it may not always predict market corrections.
 

Source: Yahoo Finance, YCharts, The Business Week Graphic

Dashed lines indicate recent Tobin’s Q peaks. The Tobin’s Q ratio is calculated using the Z.1 Flow of Funds Report. It is B.102 Line 35 (Market Value of Equities Outstanding - Net Worth (Market Value) - Balance Sheet of Nonfarm Nonfinancial Corporate Business) divided by Line 32 (Total Net Worth (Market Value) - Balance Sheet of Nonfarm Nonfinancial Corporate Business). This graph was produced by Lucas Juery, CFA, CFP^Ⓡ and is not intended to provide financial advice.

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