![]() Fed policy is undoubtedly a major factor contributing to high asset values, but intense debates over monetary policy have arguably overstated its importance. The conventional explanation for this prolonged period of high and rising valuations focuses on low interest rates and other accommodative measures taken by the Federal Reserve. 2 Indeed, with the exception of the immediate aftermath of the 2008–9 crash, valuations have remained at elevated levels since 2000 (relative to previous history), despite the fact that this period has been characterized by a financial crisis, weak productivity gains, and ongoing narratives of “secular stagnation.” The cyclically adjusted P/E ratio has remained above 1929 levels for much of the last few years and is also approaching the peak of 2000. ![]() But valuations were already high before Covid. Stratospheric valuations may be partially attributable to the unique circumstances surrounding Covid-19, as depressed trailing earnings combined with optimism about a rebound can inflate simple valuation metrics. ![]() 1 Many other asset classes have attained, or nearly attained, record valuations as well. In June, the unadjusted price-to-earnings (P/E) ratio of the S&P 500 index eclipsed the tech boom record of 2000. stock market valuations have hovered near all‑time highs.
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