On February 27th of this year, one of my heroes, Warren Buffet, said he thought stock prices were “cheap.”   However, back in 2001, he said this (updated) chart was the “probably the best single measure of where valuations stand at any given moment.”  It shows that GDP is now 129.6% of all stocks, compared to the 2000 high of 151.7%.  What looks cheap about that?

Always be careful when a market analyst tells you “yes, but it’s different this time.”  However, one thing that is different is that profits are still rising, aided by deregulation and the cut in income taxes.  (But, compare today to 1980, when Reagan did the same thing, and you will see no dramatic impact.)  Another factor might be the market is more efficient today, with the introduction of exchange-traded-funds (ETFs) and computerized trading algorithms.  Another factor might be the lack of any speculative fever, like the tech craze proceeding the “internet crash.”  Another factor might be the stock market has seen the power of monetary policy, as demonstrated following the 2008/9 collapse.

My thought is that this run-up has not been an overnight zoom to record highs.  It has worked its way upwards more slowly, back-filling along the way with corrections.  Plus, to get from 129.6% to 151.7% would require another 17% increase in stock values, and that’s assuming there is zero increase in GDP.   Finally, the continuing flow of mostly good economic data helps me sleep at night.

I’ll bet Warren sleeps well at night, and you should too!