From Probable Outcomes:
“The concept of fair value relates to the appropriate value for the stock market given existing economic and market conditions. For example, when the inflation rate is in the mid-range, then bond yields should be in the mid-range to compensate for that level of inflation. Likewise, since stocks are financial assets, the stock market’s valuation level should reflect the conditions of inflation. As a result, fair value is a relative concept, not an absolute one. Valuation is relative to the inflation rate; it is not a level that is arbitrarily anchored to a long-term average.”
And a graph from Crestmont’s site showing the relationship:
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg06nLrXOhTQ9ODrZVRMiXLddqI5x7QBZdgl7hZy1SP37R7b6ZJ0DfzVrzsgJydHY4MUVxamexaKYMZA3SoNEK1po7AJie3rA3tTgnvMPhDAo9_VN8bh25g8fu4mMA_HG4PF4f2aJCRhuU/s400/stock+inflation+and+pe.png)