- Warren Buffett’s favorite market measure is close to reaching new highs, suggesting the stock is overvalued and likely to decline in the coming months.
- The “Buffett Index” takes the total market capitalization of a country’s stock and divides it by quarterly GDP, to compare the valuation of the stock market with the size of the economy.
- Sven Henrich, founder of NorthmanTrader, a market analysis website, tweeted on Thursday that the current reading of 168% signals a “record disconnect between asset prices to the economy” .
- “Investors should be very cautious about stocks as an asset,” warned investor and market commentator Jesse Felder in a blog post on Wednesday.
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Warren Buffett’s favorite market indicator is reaching a record high, signaling that the stock is overvalued and could plunge in the near future.
The “Buffett Index” divides the total market capitalization of a country’s publicly traded shares by that country’s total quarterly domestic production. Investors use it as a rough measure of the valuation of the stock market relative to the size of the economy.
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The Wilshire 5000 total market index was worth about $ 35.4 trillion as of the end of Wednesday, while a previous estimate showed that US GDP increased to $ 21.2 trillion in the third quarter. . Using those numbers, the Buffett index stands at around 168%, close to its all-time high.
Jesse Felder, a currency manager and founder of The Felder Report, said in a blog post on Wednesday: “The stock market has never been as expensive as it is today, mostly products of skyrocketing valuations amid worsening fundamentals.
He continued: “This not only means that the forward returns can be very poor, but also means that the downside risk has never been greater than today.
Reading the Buffett indicator, combined with rising margin debt and rising market dynamics, “paints the picture of an overvalued stock market, fueled by speculative euphoria even when the price trends are exhausted, “he added.
“Investors should be very cautious about stocks as an asset class.”
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Sven Henrich, founder of NorthmanTrader, a market analysis website, echoed Felder’s comments in a tweet Thursday. The Buffett Index, he said, showed “a record disconnect between asset prices to the economy”.
Buffett hailed his measure of name in an article in Fortune magazine nearly 19 years ago as “perhaps the single best measure of the position of value at any given moment.”
Billionaire investor and Berkshire Hathaway CEO added that the rate skyrocketed to record highs during the dot-com boom should have been “a very strong warning signal” of an accident. going to happen.
Indicator Buffett has its flaws. For example, it compares the current market cap to the GDP of the previous quarter, US listed companies do not necessarily contribute to the US economy, and GDP does not take overseas income into account.
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However, this index has a strong track record in predicting recessions. It soared before the dot-com bubble burst and soared in the months leading up to the 2008 financial crisis.
Here’s St Louis Fed’s version of the Buffett Index (both market cap and GDP as of Q4 2007):