(OPINION) Michael Snyder – Stock prices are not going to stay this high. Everyone can see that we are in a stock market bubble that does not have any parallel in all of U.S. history, and everyone can see that the end of that bubble is approaching. The only debate is about how fast and how far the eventual fall will be. For the first time ever, the ratio of U.S. stock prices to U.S. GDP has reached 200 percent.
In other words, the total value of U.S. stocks is now twice as high as the value of all U.S. economic output for an entire year. To get an idea of how crazy this is, just check out this chart. Historically, the ratio of U.S. stock prices to U.S. GDP is normally under 100 percent, and so if all stock prices were cut in half U.S. stocks would still be overvalued. That is how extreme this bubble has become.
Other key valuation measures also indicate that stock prices have gotten wildly out of balance. The following example comes from a Motley Fool article entitled “Here’s Why You Should Expect a 20% Stock Market Crash in 2021”…
Looking back 150 years, the S&P 500 has averaged a Shiller P/E of 16.78. Admittedly, the Shiller P/E ratio has been a lot higher over the past 25 years. The advent of the internet has broken down information barriers for retail investors, and historically low lending rates for more than a decade have fueled borrowing and lit a fire under growth stocks.
But as of Feb. 3, the Shiller P/E for the S&P 500 was knocking on the door of 35 — more than double the long-term average. To put this figure into some context, there have only been five periods in history where the Shiller P/E ratio topped 30 and stayed there during a bull market run.
Two of these events — the Great Depression and dot-com bubble — led to some of the biggest pullbacks ever witnessed in equities. Two other events (not counting the current move) occurred within the past three years, delivering declines of 20% and 34%, respectively, in the S&P 500.
Basically what this is saying is that if stock prices fell by half, the Shiller P/E for the S&P 500 would still be above the long-term average. So if the market only falls by 20 percent this year as that Motley Fool article is suggesting, we should consider ourselves to be extremely fortunate.
We have never seen anything like this before. The bubble that we are in now absolutely dwarfs the epic stock market bubbles of 1929 and 2000. Stock market mania has gripped the entire nation, and all sorts of people have been getting rich, at least on paper. FULL REPORT
