It has been said, that the ultra-billionaire and esteemed investor/businessman Warren Buffet, considers the stock market capitalization to GDP ratio to be a favorite indicator as to whether or not the stock market is overvalued, fairly valued or undervalued. That said it is therefore necessary to understand that stock market capitalization is defined as the total dollar market value of the outstanding shares of stocks publically traded on the United States stock exchanges. In regards to GDP, this is the acronym for Gross Domestic Product, and reflects the estimated total market value of all goods manufactured as well as services produced in the United States. As it stands in February, 2020, that ratio of stock market capitalization to GDP is at 158.4% which is considered to be extremely overvalued. After all, when the stock market goes up on an annual basis, of 8% or even more, whereas the GDP of the American economy does not even exceed 3% on an annual basis, than the ratio of that stock market capitalization to the GDP is going to, over time, increase dramatically in ratio, which it has. Further to the point, it doesn't appear logical that the stock market capitalization can or should be decoupled from the GDP of the country that stock market represents, in which, a fair conclusion can be reached that when such a ratio is overvalued, this demonstrates in principle, over speculation in securities; no doubt, aided by "cheap" money and overleveraging of those investments in order to gain outsized returns in an economy that has been hovering at lukewarm for years.
All of the above should serve as a warning to those that believe that market capitalizations only always go up, and that they need not have to have any relationship with important indicators such as GDP, because apparently stock market capitalizations are entitled to have a mind of its own. The problem with this type of thinking is to a very large degree, we now find that the price of a given stock on a given day, has less to do with the fundamentals of that stock, or even the future expectations of that stock, and far more to do with people and institutions "investing" in stocks under the premise that they need not worry about much of anything, because if the stocks so bought, goes up, they make money, or at least they seem to make money, that is, on paper.
What has been forgotten is that when any underlying asset is overvalued, and the stock market capitalization to GDP ratio clearly indicates that this is true, that the way down, is far quicker and far more precarious then most pundits imagine or admit to; for when the buyers of a stock, are far outweighed by those that desire to get out of that stock, at any cost, then stock market crashes, are especially dramatic, and the adage that stocks go down a heck of a lot faster than they go up, becomes chillingly true.
Clearly, investing in stocks has fundamentally changed over recent years, so that those that buy and hold a given equity for a long period of time, are seriously outnumbered by those that maneuver in and out of the market, and therefore care a lot less about the fundamentals of a given stock, or even care to know such; and a lot more follow their own belief that they know how to speculate wisely, but they may just find, sooner or later, that speculation with equities that are overvalued, will come back to haunt them.