Monday , 4 March 2024

Present Bull Rally In Stocks Dangerously “Beyond the Pale” – Here’s Why (+2K Views)

It is frighteningly clear to any objective analyst and/or intelligent investor that thestock market present bull market  rally in stocks (2006-2014) is beyond the pale…i.e. the excess valuation is dangerously above the market excesses of the 1920s.

The above introductory comments are edited excerpts from an article* by Vronsky ( entitled The Most Equitable Measure Of Stock Market Valuation Is Market Cap/GDP.

Vronsky goes on to say in further edited excerpts:

The world’s richest man, multi-billionaire Warren Buffett, once observed that the best metric for determining the level of stock market’s valuation is the Market Cap/GDP ratio and, as such, the burning question today in the minds of institutional investors worldwide is: “What is the Market Cap/GDP ratio suggesting today” as the Dow and S&P500 Indices are churning at  all-time record highs?

Compound Annual Growth Rate Comparison: 1922-1929 vs. March 2006 to Date

To objectively answer this provocative question, we need to analyze what stocks have done since early March 2009, when the US Fed initiated Quantitative Easing (QE) with a view to avert a stock market meltdown similar to the 1929 Stock Crash.  The chart below shows the Performance (i.e. appreciation) of US major stock market indices (Dow, S&P500, NASDAQ, Russell 2000 & Wilshire 5000 Indices).


The +206% increase during this period is equivalent to an astounding Compound Annual Growth Rate (CAGR) of +25% – an almost unprecedented price gain in U.S. history. During the infamous Roaring 1920s (1922-1929) stocks rose in value by 218.7% which was equivalent to an 18% CAGR in value over those 7 years…

Buffett’s Market Cap/GDP Ratio

Market analyst Doug Short created the following two charts for the Buffett Indicator”…[qualifying each by saying]:

“The raw data for the “Buffett Indicator” only goes back as far as the middle of the 20th century. Quarterly GDP dates from 1947, and the Fed’s B.102 Balance sheet has quarterly updates beginning in Q4 1951. With an acknowledgement of this abbreviated timeframe, let’s take a look at the plain vanilla quarterly ratio with no effort to interpolate monthly data or extrapolate since the end of the most recent quarterly numbers. Here is a chart I created using the Federal Reserve Economic Data (FRED) data and charting tool.”

Short goes on to say:  “For those of you who may have reservations about the Federal Reserve economists’ estimation of Market Value, I can offer a more transparent alternate snapshot over a shorter timeframe. Here is the Wilshire 5000 Total Market Full Cap Index divided by GDP, again using the FRED repository charting tool.”

What Do These Charts Tell Us?

According to Doug Short:  “Both the “Buffett Index” and the Wilshire 5000 variant suggest that today’s market is at lofty valuations. In fact, the latest quarter in the Wilshire version is the third highest in its history, fractionally topped by two quarters in 2000.”


Prudent investors should beware of a possible stock market crash brewing on the horizon…which may be the prime reason why billionaire Warren Buffett’s flagship (Berkshire Hathaway) has an all-time  record $57 billion cash hoard.

Today’s stock valuation is more grossly exaggerated and unrealistically inflated than in the 1920s. Historic testament suggests today’s pie-in-the-sky lofty stock prices are irrational and driven by the artificial force of the Fed’s QE and fueled by illogical investor complacency.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.


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