Doug Short has been keeping up a chart of the Buffet Indicator (market cap to GDP). He points out that it shows that the market is valued at two to three standard deviations above the valuation mean.
What I see on the chart is a classic three-part Sornette bubble, which suggests that valuations have a lot further to go.
Part 1 of this Sornette bubble ended with a classic lumpy top in the 60s through early 70s. Part II of the Sornette bubble topped in 2000 with the dot.com bubble. Part II always completes with a classic vertical bubble melt-up.
You don’t always get a third part, but in this case there’s a classic Sornette bubble part 3 on the chart. When there’s a Part 3, it’s always at least as big of a move as the move from the low to the high of Part 2, and usually bigger. Part 3 also tends to take a lot less time than part 2–typically, it goes from low to peak in about 1/3 the time it takes for Part 2 to move from low to peak.
This suggests the vertical move in the Buffet Indicator will be accelerating from here and has probably traveled only about halfway to its bubble target.
The increase in the indicator doesn’t have to come entirely from rising stock prices. It could come from a crashing GDP as well.