In the December outlook of my newsletter (subscribe here), I noted a change in tone from the Federal Reserve in regards to their interest rate outlook. Specifically, I said that the statements they made about stopping their bond buying program by March, earlier than expected, could be a potential game changer.
They upped the ante in December by introducing the possibility of the Fed funds rate increasing “sooner or at a faster pace” than had been anticipated. Additionally, the minutes from their meeting also raise the possibility that the FOMC will allow the Fed’s balance sheet to begin unwinding “relatively soon” after they begin raising the funds rate. Obviously, there is no guarantee it definitely will translate into action, as the pandemic has made it clear how quickly things can change. That said, the change in the FOMC’s tone is quite noteworthy.
Clients and I have talked quite a bit about how crucial the Fed’s bond-buying program has been to the swift rise of stocks since the start of the pandemic. As a result, we're now at market valuations last seen in the tech bubble of the late nineties.
Market Cap to GDP is a long-term valuation indicator for stocks. It has become popular in recent years, largely thanks to the influence of Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."
Market Cap to GDP is commonly defined as a measure of the total value of all publicly-traded stocks in a country divided by that country’s Gross Domestic Product. The MC to GDP ratio is currently 50% higher than what we saw at the tail end of the tech boom.
