The US S&P 500 Index fell some 23% in the first six months of the year, as biting inflation gave policymakers few options but to raise interest rates, and raise them quickly.
Over the summer, equity markets recovered somewhat, as new evidence suggested that inflation might have peaked. However, recent investor optimism was extinguished on Friday by Fed chair Jay Powell, who poured cold water on the idea that the Fed might slow down. Powell warned that more rate rises are coming and that there will be "some pain" for households and businesses. US stocks fell more than 3% almost immediately after he finished speaking, and have continued to slide further this week.
So, where are we now?
The recent stock market moves left us wondering where equity valuations were. With hundreds of different ways to value stocks, we settled on arguably the simplest: the ratio of total market cap to GDP. It's a simple metric that compares the total value of public equities with the actual economic output of the country as a whole.
A favorite of a certain Warren Buffett — who celebrated his 92nd birthday yesterday — the indicator currently sits just shy of 170%. On its own that number doesn't mean much, but when placed in historical context it's striking. Even after the recent fall in markets the ratio is still one of the highest on record, north of the ~140% recorded during the dotcom bubble of 2000, and considerably elevated compared to the average since 1995 (109%).