In the US stock market, there is a famous "Buffett indicator", that is, the ratio of the total market capitalization of a country's stock market to GDP, which is praised by legendary investor Warren Buffett as the best single indicator for measuring stock market valuations and judging future trends, hence the name.

After the release of second-quarter GDP figures on July 30th, the index soared to 170% for the first time in history.

In a recent interview, Michael Kantrowitz, chief investment strategist at Cornerstone Macro, pointed out that this means that the stock market is becoming more and more important to the economy, and that the decline in the stock market will naturally cause more damage to the overall economic performance of the United States.

"We know that the stock market is an important part of the economy, and the impact of the wealth effect cannot be ignored. However, this part of the stock market has become much larger than at any time in the past three decades, and the root cause of this result lies in the Fed's policy and interest rate cuts. "

Cantrowitz added that "if the market falls now and has a negative impact on the economy, there are far fewer tools available to deal with it than before," because the Fed's operations are much less effective than they used to be. and they can't actually lower interest rates any further.

Last week, Cantrowitz released a research report entitled "US stocks are too big to fail", pointing out that in addition to the Buffett index, the correlation between consumer confidence and the S & P 500 is also at an all-time high. The Fed's benchmark interest rate remains close to zero, and government transfer payments have accounted for 46% of income, also a record.

As the epidemic continues to ravage, these trends are expected to intensify. Mr Cantrowitz predicted that if a market consolidation occurred, the government would receive "a terrible bill".

"Today, more than ever before, it is in the best interest of policy makers to prevent the stock market from falling. "

Recently, many commentators have begun to pour cold water on bullish investors, predicting that the U. S. stock market will repeat the mistakes of the tech bubble of the 1990s. Cantrowitz pointed out that although the price-to-earnings ratio is as high as it was in the late 1990s, the reasons for this result are fundamentally different, when it was due to "crazy high growth expectations." today it is because of expectations of a long-term low interest rate environment.

He added that if economic growth slows further in the current environment, investors can actually benefit from new easing, continued leadership of growth stocks, and possibly higher price-to-earnings ratios.

Of course, Cantrowitz does not think that U. S. stocks are unlikely to fall. However, "the 'cost' of falling share prices has never been higher," as the general public is increasingly concerned about the performance of the stock market. Any policy pullback, or a weakening of the rescue effort, will rattle the markets and thwart the overall recovery of the US economy.

"it seems that for most people, letting the music continue to play, continue to support the stock market, and thus support the economy, is already the relatively cheapest and convenient option. "

It is not hard to see that Cantrowitz's view of the total market capitalization / GDP ratio is different from that of Buffett. In his view, this indicator "is not only a measure of valuation, but also a measure of the economy's dependence on the stock market." In other words, the fall in the stock market will have a much greater impact on the economy, given that the ratio of the US stock market to the economy as a whole has reached an all-time high.