Stock Market -- Fundamental

S&P 500: 1274

I use three different fundamentals - based models to track
the SP500. All imply that from an empirical perspective the
S&P is reasonably valued in the range of 1280 - 1300. I
do not put too much stock in the predictive value of any
of these approaches, but use them more as a diagnostic
reference. Even then, I would not make too much out of
divergences until they exceeded 6% or so. For me, the market
looks reasonable enough now.

To summarize the output of the models, the market's rally since
this past autumn reflects a continuation of above average
earnings growth and an expanding p/e ratio to reflect a moderation
of inflation pressure which in turn has been supported by a
moderate easing of liquidity policy by the Fed as well as
continued good growth of the SP500 dividend. The key changes in
the mix since last October or so have been a step up in the
growth of the monetary base and a reduction of inflation pressure
stemming from lower fuels prices.

The risk premium of the market (earnings/price yield - 91 day T-Bill
yield) is continuing to shrink from once very high levels. Thus,
risk continues to rise, and it will be interesting to see how
the market holds up if the Fed tacks on another 50 basis points
to the FFR% over the next few months. Could be a character builder
for investors.