Could the Stock Market Boom Be a Bubble?

thebalancemoney.com:

Is today’s roaring stock market in a bubble?

The value of all the stocks in the S&P 500 benchmark stock index was 1.79 times the size of the entire economic output of the country for the year as of Thursday, according to data compiled by Michael O’Rourke, chief market strategist of Jones Trading Co., and shown in the chart below. And stocks continued to go up on Monday after the announcement that President Joe Biden would nominate Jerome Powell for another term as chair of the Federal Reserve.

The ratio indicating the market cap of the S&P 500 versus gross domestic product (GDP) is akin to the so-called “Buffett Indicator,” named after renowned investor Warren Buffett, who invented a measure comparing the nation’s total stock value to its economic output 20 years ago. To some analysts, a high Buffett Indicator is a signal that stocks are overvalued and primed for a crash.

So, has today’s roaring stock market driven the stocks-to-GDP ratio into dangerous territory? Well, for comparison, the S&P 500 market cap never got more than 1.21 times the size of GDP, even during the dot-com bubble of the 2000s. The average over the last three decades has been about 84%.

“Since the U.S. financial markets have achieved new levels of insanity, we want to make sure we document this moment in time for posterity’s sake,” O’Rourke wrote in a commentary last week. “We are among the few who fear a 50% S&P 500 valuation drop that would bring the index’s market capitalization back in line with its average historic relationship to GDP.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.