Yikes—Stocks Are Priced High! Too High?

Stocks have been on an uphill march since we began to exit the financial crisis of 2008–09. Massive monetary and fiscal intrusion into the market was thought needed to blunt the crisis, and even more when the pandemic hit in early 2020. Trillions of dollars buoyed asset values from cars to homes and from stocks to cryptocurrency. Anyone participating in these investments was making a lot of money—and still is today. But will it continue? Or are we going to finally get back to cyclical economic history and see stocks take a great fall?
Comparing the value of the stock market to the value of the economy underlying the stock market, the Buffett indicator is like a P/E ratio. Buffett developed the indicator during the aftermath of the 1990s internet bubble that ultimately burst. This was a period when tech stocks had been driven by dot-com hype, as their stock prices pumped up valuations higher and higher relative to actual economic activity. They finally crashed in the early 2000s. Warren Buffett said that the ratio was “probably the best single measure of where valuations stand in any given moment.”