Do these charts of the Dow Jones Industrial Average concern you? I'm absolutely not familiar with economics, so if anyone here is knowledgeable on the subject I'd love to hear your input. I can't help but think that we're currently in an extreme stock market bubble which, when it pops, could be very, very bad for the economy.
Your post contains a few different questions, so I'll break them out one by one:
Is the stock market overvalued, are we due for a bear market?Yeah, probably. The market is increasingly expensive relative to earnings and the current bull market has been going on a looonngg time. We are due for a correction, although I am neither smart or dumb enough to take a guess when.
Are we in an 'extreme market bubble'?No. People like to say 'bubble', but how does our situation compare to the bubbles of the past?
Take a look at this chart of the price to earnings ratio for the S&P 500.
If the stock market is overvalued, people will be paying more for one year's earnings. i.e. the PE ratio will go up. The market has a PE ratio of about 25 right now, which is admittedly on the high end. However, it isn't that high, when you compare it to the 1920's or the tech bubble, where the PE ratio reached nearly 40!
Getting away from the hard numbers, I haven't seen some of the 'anecdotal signs' of a bubble. No cabbies or shoe shine boys are giving me stock tips for example.
If the market crashes, what would the effect be on the economy?Depends on why the market crashes. For example, when the tech bubble popped, the effect on the market wasn't that bad as the problem was largely confined to a particular sector. Compare this to 2008, when the market was crashing because a real estate bubble was popping, liquidity crunched, and the banking system nearly collapsed. That had all sorts of nasty, nasty effects on the economy. What's the cause of the market crash in your hypothetical?
Tl;dr: The market is overvalued but not in bubble territory. The effects of a crash on the economy will depend on the reasons for said crash.
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