He’s right, to an extent. The Price-Earnings ratio for aggregated publicly owned businesses is at historic highs. His reasoning centers on four factors: the Fed’s raising of its benchmark interest rates, which will make money cost more for businesses; the Fed’s reducing its own government bond holdings, which will contribute to upward pressure on interest rates generally; the Federal government’s needing to borrow to cover its still enormous deficits; and heretofore easy money has made the labor market too tight.
There are a couple things about Feldstein’s four reasons. One is that the improving economic activity will greatly mitigate (albeit not eliminate) stock price falls by raising business earnings to meet those falling stock prices—both the numerator and the denominator of the P/E ratio, after all, are dynamic, not only the numerator (albeit the one is capable of moving faster than the other). Prices won’t fall as far as Feldstein seems to think.
Another thing is that Feldstein’s third reason is a prime argument for the Progressive-Democratic Party to get out of the way and allow Federal spending to be cut.
A third thing is that Feldstein is overstating the case in his fourth reason. The labor market isn’t as tight as it might seem, given that the underemployed per centage remains at elevated levels, as does the number of workers who’ve left the labor market because they’ve given up; the latter is a population that can be persuaded to return to the labor force.