Is The Stock Market In A Bubble? Equity Valuations Say YES!
The “is it a bubble” debate continues, this time with a couple of popular mainstream metrics.
First is the Buffett Indicator, named after the man who popularized it, Warren Buffett. At its core, it is a ratio of total stock market capitalization to nominal GDP.
In order to capture as much of the US stock market as possible, the Wilshire Full Cap Price Index is used, divided by US nominal GDP… with breathtaking results.
The Buffett Indicator is currently at all-time highs. That’s the highest ever.
Higher than it was during the Dot com bubble at the turn of the millennium, and higher than it was during the Great Financial Crisis of 2008. If the Dot com bubble was considered a bubble, then by this measure, 2021’s US equity market is definitely in a bubble.
Another common indicator whipped out during times of stock market bubble-liciousness is the Cyclically Adjusted Price-to-Earnings ratio, or CAPE.
Popularized by Robert Shiller, the CAPE seeks to smooth out the volatility inherent in each business cycle by dividing the S&P 500’s index value by a 10 year average of inflation adjusted earnings per share (EPS).
After doing the math, it currently looks like this:
By this measure, 2021 stands lower than what the indicator was in the Dot com bubble, but slightly higher than what it was at the peak of the Roaring 20’s bubble, just before the onset of the Great Depression.
The Roaring 20’s were called Roaring for a reason, epitomized and immortalized by F Scott Fitzgerald’s Great Gatsby; point being, if there ever was a bubble, it was in US stocks heading into 1929.
As such, the CAPE is also flashing “bubble” warnings. Together with the Buffett Indicator and the surge in retail FOMO stock chasing, the chances of this ending badly are running pretty high.
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