Buffett Indicator at All-Time Highs: A Cause for Concern?
In 2001, Warren Buffett famously described the stock market capitalization-to-GDP ratio as “the best single measure of where valuations stand at any given moment.”
This ratio, now commonly known as the Buffett Indicator, compares the size of the stock market to that of the economy. A high ratio indicates an overvalued market—and as of February 11, 2021, the ratio has reached all-time highs, indicating that the U.S. stock market is currently strongly overvalued.
Today’s graphic by Current Market Valuation (CMV) provides an overview of how the Buffett Indicator has changed since 1950. We’ll also explain how the ratio is calculated, and why things might not be as dire as seem.
The Buffet Indicator, Explained
Before diving into the data, let’s cover the basics—what is the Buffett Indicator, and how is its value calculated?
The Buffett Indicator is a ratio used by investors to gauge whether the market is undervalued, fair valued, or overvalued. The ratio is measured by dividing the collective value of a country’s stock market by the nation’s GDP.
Measuring Total Value
CMV used the Wilshire 5000 index, along with data from the Federal Reserve for historical data, to measure the collective value of the U.S. stock market. Here’s a look at the nation’s composite market value since 1950:
As the chart indicates, the market’s experienced steady growth since 2010. And as of February 11, 2021, its total value sits at $49.5T.
For the data on (Read more...)