Ritter / Rick Wilking
- Warren Buffett’s chosen market gauge is nearing a new high, indicating that stocks are overvalued and could rise in the coming months.
- The “Buffett indicator” takes the total market capitalization of the country’s stocks and divides it by quarterly GDP to compare the stock market valuation with the size of the economy.
- Sven Heinrich, founder of the market-analysis website NorthMentrader, said that currently 18% of signal readings “disconnect the record between asset prices considering the economy”. Tweeted on Thursday.
- “Investors should be very careful about equity as an asset class,” investor and market critic Jesse Felder said in a blog post on Wednesday.
- Visit Business Insider’s homepage for more stories.
Vern Run Buffett’s favorite market indicator is approaching a record high, signaling stocks have been overvalued and will fall soon.
The “Buffett indicator” divides the combined market capitalization of publicly sold stocks in the country by its quarterly gross domestic product. Investors use it as a rough gauge of stock market valuations regarding the size of the economy.
The Wilshire 5000 total market index was about લગભગ 435.4 trillion as of Wednesday’s close, while previous estimates put US GDP at .2 21.2 trillion in the third quarter. Using these figures, the Buffett indicator is close to its all-time high, about 168%.
Money manager and founder of The Federer Report, Jesse Felder, said in a blog post on Wednesday that the stock market has remained as expensive as it is today, largely a product of valuation amid deteriorating fundamentals.
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“It doesn’t mean that the next return will be exceptionally weak, it means that the negative risk has never been higher than it is today.”
He said the Buffett indicator reading, coupled with heavy levels of margin debt and the momentum of the flagging market, “depicts a highly valued stock market driven by speculative enthusiasm even when the price trend is weakening in a steam situation.”
“Investors should be very careful about equity as an asset class,” Felder added.
Sven Heinrich, founder of the market-analysis website NorthMentrader, echoed Feder’s comments. In a tweet on ThursdayThe Buffett indicator reading shows that “disconnect the record between asset prices relative to the economy.”
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Warning signs
Buffett praised his name gauge in an article in Fortune Magazine almost 19 years ago, saying “this is probably the only best way to evaluate at any moment.”
The billionaire investor and CEO of Berkshire Hathaway added that during the dot-com boom, the intensity of the ratio reached a record high, which should be a “very strong warning sign” of an impending crash.
The Buffett indicator has its flaws. For example, it compares current market capitalization to the previous quarter’s GDP, US-listed companies do not necessarily contribute to the American economy, and GDP does not account for foreign revenue.
But the metric has a track record of downturn predictions. It grew before the dot-com bubble burst and in the months leading up to the 2008 financial crisis.
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This is the St. Louis Fed version of the Buffett indicator (both market cap and GDP are indexed in the fourth quarter of 2007):
St. Louis Fed
