Paul Tudor Jones says a stock market that's 220% of GDP is making him nervous

Published Mon, Jun 14 20219:27 AM EDTUpdated Mon, Jun 14 20219:51 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Billionaire investor Paul Tudor Jones said Monday that the high stock-market valuation makes him uneasy and warned the Federal Reserve could be adding to financial instability with its aggressive policy stance. The hedge fund veteran told CNBC's Andrew Ross Sorkin on " Squawk Box " that the stock market appeared richly valued relative to the broader economy, comparing it to the top of previous market cycles before significant corrections in recent decades. "I get nervous, from a financial instability standpoint, when the stock market is 220% of GDP. I get nervous when I know that number was 45% higher than the 2000 bubble and I know it's 90% higher than the 2007 top," Jones said. The ratio of the total stock market to the total economy has been referenced by the hedge fund manager in the past. It's a basic top level way of highlighting how stock prices could be out of whack with reality, although traders don't use it as a market timing tool, just as something to watch. It has sometimes been referred to as the "Buffett Indicator" because the Berkshire Hathaway chairman once mentioned it in an interview as something he follows. The stock market fell sharply when the pandemic first hit Europe and the United States last year, but dramatic responses from the Federal Reserve and elected officials on the fiscal policy side helped stocks rebound quickly. The S & P 500 and Nasdaq Composite now trading well above their pre-Covid highs, with the 500-stock index hitting another record last week . Part of that policy response was asset purchases by the Fed, which is still buying billions of Treasury bonds every month. Jones said the Nasdaq could climb another 20% by the end of the year if the Fed continues those purchases. "I don't know if that's necessarily a good thing. I don't know if continuing to increase valuations through monetization is the right and most prudent course right now," he said. Jones was critical of the central bank throughout the interview and said investors should bet heavily on inflation plays if the Fed doesn't change its mind about rising prices at its meeting later this week. Inflation readings have jumped sharply in recent months, but Fed officials have said that the price increases should be transitory as the economy works through supply and demand issues related to the pandemic. The inflation reports have also been disproportionately impacted by certain sectors, such as used car prices. To be sure, the market's valuation has actually moderated in recent months in some metrics as a strong corporate earnings season and increasing confidence about the economic recovery have raised the projected income for corporate America in the year ahead. GDP is also expected to grow sharply over the next 12 months.

Paul Tudor Jones speaking at the World Economic Forum in Davos, Switzerland, January 21, 2020.

Adam Galica | CNBC

The hedge fund veteran told CNBC's Andrew Ross Sorkin on "Squawk Box" that the stock market appeared richly valued relative to the broader economy, comparing it to the top of previous market cycles before significant corrections in recent decades.