Stock market bubble — 2021/2022

Kishen Das
7 min readJan 16, 2021

There are several factors and the past history that indicate that the stock market is in a major correction territory. Since stock market happens to be a lagging indicator and futuristic, it usually takes a while before it keeps up with the realities of the economy. I am listing down some important points on why I feel the stock market is overvalued and why its due for a drastic correction.

  1. Historically, a split congress has always been more positive for the stock performance

When both senate and house are held by the same party, they have more power to make decisions, which can result in some drastic measures which affects investor sentiment and the economy. For example Biden can now raise corporate tax rate without much opposition from Republicans. Below is the graph showing historic stock performance under unsplit and split congress.

2. Buffet Indicator and Shiller CAPE ratio are at their all time high in recent times

The Buffett Indicator is the ratio of total US stock market valuation to GDP. As of January 7, 2021 we have:

  • Aggregate US Market Value: $47.5T
  • Current (Estimated) GDP: $21.6T
  • Buffett Indicator: 220%

This is currently 81% higher than the historical average, suggesting that the market is Strongly Overvalued.

Professor Robert Shiller of Yale University invented the Shiller PE Ratio to measure the market’s valuation. The Shiller PE ratio is a more reasonable market valuation indicator than the PE ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. Shiller PE ratio is now at around 34.4, much above the historical average of 17.1, which also indicates that the market is overvalued.


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