Warren Buffett once wrote that investors would see the dot-com crash coming from a mile away if they paid attention to what he described in a 2001 Fortune article as “perhaps the single best measure of the position of the valuation at any given moment.
Called the “Buffett Index” by investors, the measure is simply the total market cap of all US stocks relative to the country’s GDP. When it is between 70% and 80%, it is time to throw your cash into the market. When it moves above 100%, it’s time to lean in the risk-free side.
Apply that measure worldwide, and as you can see with this chart from Holger Zschaepitz, market analyst for Die Welt, a sell signal is blinking. In fact, the indicator just surpassed its 30-month high:
Over the past two decades, global markets have had three big hits after the ratio rose to three digits ̵1; in 2000, 2008 and again in 2018.
Meanwhile, the deep dive into the US market, where stocks are surging in the face of a coronavirus pandemic, suggests that the index is rising in all-time record territory.
However, at present, the US stock market continues to rise. On the last test, Dow Jones Industrial Average DJIA,
increased by more than 200 points, while both the S&P 500 SPX,
and Nasdaq Composite COMP,
also kept the green in Wednesday session.
As for Buffett, he was much more active towards the end of the year, after facing criticism for his lack of maneuverability during the coronavirus crisis. However, Berkshire BRK.A,
, despite intensifying its acquisitions and building its position in the Bank of America BAC,
, worth $ 146.6 billion in cash.