After the Great Depression, the GDP was used to take the stock market's temperature. But over the years, it increasingly became a measure of how well society was doing, "and those are two very different things," noted Stiglitz. In fact, he also counsels market participants to avoid using the stock market as a measure of economic health, especially now in the midst of the downturn. "The stock market is a very bad measure of how the overall economy is doing," he explained.

For one thing, said Stiglitz, the stock market could be bolstered by falling wages. Consider the current situation: it is likely that the true U.S. unemployment rate is much higher than the official 9.7%, putting extra downward pressure on wages. Sinking wages can boost short-term profitability for individual companies but ultimately diminish aggregate demand, stifling a strong economic recovery.

Today's stock market prices also may appear high because the Fed is keeping interest rates low, realizing that the economy is not yet in a robust recovery. Low interest is a natural deterrent for investors looking for a decent return. "Would you rather get zero on your bank deposits or put your money in the stock market — even with the risk?" Stiglitz asked the crowd.

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