With the memory of the 2008 / 2009 stock market crash still fresh in investor’s minds, many investors are wondering: How Identify a Stock Market Bubble To Avoid The Next Stock Market Crash? Market bottoms and tops have historically been marked by excessively bearish investor sentiment (bottoms) and excessively bullish investor sentiment (tops). The Ratio of Total Market Cap (TMC) Relative to the United States Gross Domestic Product (GDP) is stock market valuation gauge that is one of the best indicators of whether the stock market is undervalued or overvalued at any given point in time. This ratio is also known as the Total Market Cap to Gross Domestic Product (TMC:GDP) Ratio.
To calculate this ratio, you simply take the total market capitalization of the all the stocks in the stock market and divide it by the latest reported total GDP for the United States. This gauge is useful to get out of the stock market ahead of a crash because economic downturns usually cause stock market sell-offs, and occasionally stock market crashes.
When the BCIg crosses the red zero line while on a downward trend on the chart below, a recession is imminent and it is time to consider taking a defensive position in the stock market, if you have not already done so. By the middle of 2008, many stock market indicators were flashing warnings signs concerning overvalued stock market valuation levels and the potential for a stock market crash, but it was not until a banking crisis ensued in the fall of 2008 that the stock market actually crashed.
It is important to understand that several stock market indicators should be assessed to gauge the valuation of the stock market at any given, as any one indicator could provide a reading that is being affected by temporary factors and is representative of a stock market that is actually overvalued and susceptible to a crash. If a stock market crash is caused by a recession, savvy investors look for an opportunity to get back in for an eventual recovery in stock prices. I am still learning as the market is changing, too, and one can’t predict its behavior.
The time to put money back into stocks is approximately halfway through a recession, when stock market indicators are excessively bearish and the economy appears to be bottoming. Stocks usually start recovering midway through a recession, as investors buy stocks in anticipation of an economic recovery that will eventually send corporate earnings and stock prices higher. Stock prices plummeted worldwide Monday, amid heightened fears of a US recession.