No, Professor Siegel, the Dow Isn't Worth 18,500

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Disappointing results from General Electric and Intel weighed on the major indexes on Friday, as the S&P 500 fell 0.39%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) managed to gain 0.25%.

The end of the week is a good opportunity for calling out pundits and experts. Today, it's the turn of Wharton School professor Jeremy Stocks for the Long Run Siegel, who told CNBC yesterday:

We're much closer to fair market value [in the stock market] now than we were a year or two ago. I still think we are below fair market value; I still think we got 10% to 15% to get there, in the markets. We know nothing goes in a straight line up to fair market value; we know nothing goes in a straight line up to fair market value, it either has a correction or will overshoot, but I'm calling for around 18,000, 18,500 is what I think is the fair value for the Dow.

It would appear that, for Prof. Siegel, there's no level at which stocks ought not to be higher. Not everyone agrees. Back on Sep. 19, Berkshire Hathaway (NYSE: BRK-B  ) CEO Warren Buffett told CNBC that stocks were:

...probably more or less fairly priced now. We don't find bargains around, but we don't think things are way overvalued either. We're having a hard time finding things to buy.

Since then, the Dow has risen by 5.2%. If we accept Buffett's assessment that the market was fairly valued in September, then it can be no better than fairly valued today. Indeed, it's generous to assume that fair value has increased by 5% in four months, given that the current consensus estimates for Dow operating earnings imply just 7.3% growth in 2014. As such, the notion that the Dow remains 10% undervalued seems difficult to justify at present, with a range of valuation indicators now suggesting the market is, at best, fairly valued, with some suggesting a degree of overvaluation.

However, it does not surprise me from Prof. Siegel, who is an inveterate bull. However, I'll admit that the margin of error around the market's valuation could certainly be plus or minus 10% -- this isn't an exact science. Whether or not it is warranted, I agree with Prof. Siegel wholeheartedly that the market can still go higher. We're not in a stock market bubble and, as Prof. Siegel observes:

What I still think is a push in the market: I still don't think the public is back. I mean they're tiptoeing in, but when you look at the flows into the equity funds, it's not there... When you go to the general investing public, they're still very skeptical. We got to bring them much more in until we get to the top of a bull market.

I don't much like the tone of the last sentence, in which he appears to unwittingly (and rather accurately, I might add) lump himself in with the stock market cheerleaders pulling individual investors into the market in order for them to form a market top.

Because we're not in a stock market bubble, these debates on the market's valuation may appear a bit picayune and, to a degree, they are. Focus on saving and investing regularly and, if you're picking stocks, concentrate on defensible franchises that are trading at acceptable (or attractive, ideally) prices. If you can do that, you needn't bother listening to pundits like Jeremy Siegel (or his critics.)

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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