Is the market fairly valued?

Well, the KLCI has been rising over the last couple of weeks. Its now at 920, from 860 about a month ago. That's a gain of about 7%. Not bad at all.

I'm not particularly given to commenting on the day to day or even week to week gyrations of the stock market. If 2008 taught me anything, it is that in the long run, the stock market reflects the performance of its constituent businesses.

I'm also realising that over the long run, the average public listed company can only increase its intrinsic value by about 5-7% a year. Thus, stock prices should only appreciate by that amount per annum. Anything more than that is not sustainable. Of course, in addition to the capital appreciation, investors can also receive dividends, which also contribute a long term return of say, 2-3%.

I'm currently thinking about how to value stocks when taking into account the possibility of a severe recession or depression. My guess is global stocks in general would have to fall about 30% to be fairly valued in a severe recession (think Malaysia's financial crisis), and about 50% to be fairly valued in a Great Depression Scenario.