When people start claiming that the stock market is in a bubble, they usually throw all kinds of indicators at you.
*Look at this, so high. Look at this, so out of whack.*
One such indicator is named after the oracle of Omaha, Warren Buffet, and is known as The Buffet Indicator.
Because back in 2001, he is quoted to have said:
“…it is probably the best single measure of where valuations stand at any given moment.”
The ‘it’ Warren Buffet is referring to is the ratio of total U.S. stock market valuation (Market Cap) to GDP.
Simply put, it’s a valuation metric that tells you if the stock market is overvalued or undervalued, compared to its historical average.
The Wilshire 5000 Total Market Index is a market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States.
Gross domestic product (GDP) is the total market value of all the finished goods and services produced.
($34,609,360,000,000 / $19,490,000,000,000 ) * 100 = 178%.
As of yesterday, the Buffet Indicator is at 178%.
If the ratio is:
- 50% to 75%, the market is considered modestly undervalued.
- 75% to 90%, the market is considered fairly valued.
- 90% to 115%, the market is considered modestly overvalued.
- 115% to 135%, the market is considered overvalued.
- 135% to 160%, the market is considered significantly overvalued.
So yes, the market is more than significantly overvalued. The companies in the stock market are not producing enough to warrant their valuations. A correction is imminent.
It could be triggered by a recession, but not always. Why? Because we are already in a recession but the stock market doesn’t seem to care.