Market Tops and V-Shaped Recoveries
The research I am currently working on focuses on whether the U.S. stock market is overvalued and how to identify the shapes of market cycles. In a project with Michael Angel, we have been analyzing the “Buffett Indicator”—the ratio of the market value of the S&P 500 to U.S. GDP. Historically, from roughly 1950 to 2009, this ratio fluctuated around a long-run normal range. However, since 2009 it has risen almost continuously. Our central question is: Why has U.S. equity market value grown so much faster than the underlying U.S. economy?
We are investigating possible explanations from both a monetary policy perspective and an AI-driven productivity perspective, exploring whether structural changes in technology, liquidity, and global capital flows have altered market equilibrium values.
A second line of research, with Barclay Roper and Khurram Naveed, examines the different shapes that market downturns and recoveries can take. Market declines may be followed by V-shaped, U-shaped, L-shaped, or more complex recovery patterns. Our work focuses in particular on V-shaped recoveries, where markets rebound sharply after a steep fall. We are testing which factors—especially interest-rate spreads—can help identify, at the bottom of a downturn, whether the subsequent recovery is likely to be V-shaped.
Preliminary findings from our “tops and bottoms” analysis suggest that the way the Federal Reserve has managed monetary policy plays a significant role in the elevated valuation of the U.S. stock market. We are also evaluating how much expected AI-driven productivity growth is currently embedded in equity prices.
Results from the V-shape research indicate that most market recoveries since 2011 have indeed been V-shaped, and that the non-V-shaped recoveries tend to coincide with major structural crises.