Therefore, maintaining healthy market conditions are of concern to policy makers. The questions I have with respect to equity markets go to the issue of valuation and the wealth effect. Economists propose numerous approaches to determining the “correct” level of equity prices.
One such approach compares equity market valuations (namely earnings/price ratios) to the return on fixed income securities, generally the ten-year U.S. Treasury bond. But many observers have suggested that this measure of “correct” stock market valuation may no longer be accurate.