“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 (SPX) 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.

Bull Market

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.

“Housing at this stage as you know is moving nowhere,” he said.

Market Balance

The former Fed leader, who opposed excessive financial regulation as a central banker, said the best thing U.S. policy makers can do is refrain from interventions that prevent markets from settling to a proper balance.

“Allow markets to heal,” he said. “Markets have been consistently bombarded with all sorts of policy decisions,” which “has clearly prevented markets from adjusting.”

Treasury 10-year yields rose from almost the lowest level in three months after the Institute for Supply Management said its factory index climbed to 54.8 last month, exceeding the most optimistic forecast in a Bloomberg survey, from 53.4 in March. Readings greater than 50 signal growth.

The 10-year yield rose three basis points, or 0.03 percentage point, to 1.95 percent, according to Bloomberg Bond Trader pricing. It touched 1.90 percent before the manufacturing report.

The former central banker’s comments on equities haven’t always been timely. In 1996, Greenspan said the stock market may reflect “irrational exuberance” when the Dow Jones Industrial Average was above 6400. The index peaked at over 11,700 in January 2000, before technology stocks slumped.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

http://www.bloomberg.com/news/2012-05-01/greenspan-says-u-s-stocks-very-cheap-likely-to-rise.html

• Asian Stocks Rise on Faster Japan Inflation, U.S. Outlook   (2014-05-30 09:33:27)
• Asian Stocks Rise on Faster Japan Inflation, U.S. Outlook   (2014-05-30 09:33:27)
• Asian Stocks Rise on Faster Japan Inflation, U.S. Outlook   (2014-05-30 09:33:02)
• Asian Stocks Fluctuate After Japan Retail Sales Slump   (2014-05-29 09:37:51)
• Asian Stocks Fall Second Day as Health-Care Shares Drop   (2014-04-08 08:52:58)
• Industrial Stocks Take ETF Bounty   (2014-04-08 08:52:29)
• Asian Stocks Set for Second Weekly Gain Before U.S. Jobs   (2014-04-04 09:46:16)
• Australia Model Curbs Speed as CEO Says U.S. Too Far Gone   (2014-04-04 09:45:49)
• Asia Stocks Rise 4th Day as Consumer Shares Lead Gain   (2014-03-31 10:48:33)
• Asia Stocks Swing After U.S. Manufacturing Index Falls   (2014-03-25 11:29:14)