(Bloomberg News) Former Federal Reserve Chairman Alan Greenspan said U.S. stocks offer good value and are likely to rise as corporate earnings increase over time.
"Stocks are very cheap," Greenspan said today at the Bloomberg Washington Summit hosted by Bloomberg Link, citing "a very low price-earnings ratio."
"There is no place for earnings to grow except into stock prices," said Greenspan, who served as Fed chairman from August 1987 to January 2006.
Stocks have rallied on better-than-forecast corporate profits and signs of economic strength. The Standard & Poor's 500 Index has risen more than 12 percent this year, the best start to a year since 1998.
The index rose 1.1 percent to 1,413.83 at 12:57 p.m. in New York after a report showed that U.S. manufacturing unexpectedly expanded in April at the fastest pace in 10 months.
The S&P 500 trades for 14.3 times reported income from its companies, or 13 percent below the average since 1954, according to data compiled by Bloomberg News.
Another valuation metric, known as the Fed model because it was derived from a July 1997 report from the central bank, shows U.S. equities are close to the cheapest level ever relative to debt. The technique compares the earnings yield for stocks with Treasury rates.
Profit for S&P 500 companies has represented 7.2 percent of the index's price on average in 2012, or 5.91 percentage points more than yields on 10-year Treasuries, according to Fed model data compiled by Bloomberg. That compares with the average difference of 0.03 percentage point and the record high of 6.99 points when the bull market started in March 2009, according to data compiled by Bloomberg going back to 1962.
Greenspan said the rising stock prices create a "wealth effect" that boosts consumer spending and the overall economy. "So equities play a hugely important role, which I think is grossly underestimated," he said.
In a separate interview on Bloomberg Television's "Surveillance Midday" with Tom Keene, Greenspan said a lack of long-term investment in housing and nonresidential construction was hurting employment.