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- Warren Buffett’s preferred stock-market gauge hit a record high, signaling that stocks are overvalued and that a crash could be coming.
- The “Buffett indicator” divides the total value of publicly traded stocks by quarterly GDP.
- “It is probably the best single measure of where valuations stand at any given moment,” Buffett wrote in a Fortune magazine article in 2001.
- The famed investor and Berkshire Hathaway boss said it was “a very strong warning signal” when the indicator peaked just before the dot-com bubble burst.
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Warren Buffett’s favorite stock-market indicator has climbed to a record high, signaling that stocks are overvalued and that another crash could be coming.
The so-called Buffett indicator takes the combined market capitalizations of a country’s publicly traded stocks and divides it by quarterly gross domestic product. Investors use it to gauge whether the stock market is overvalued or undervalued relative to the size of the economy.
Buffett, a billionaire investor and the boss of Berkshire Hathaway, described it in a Fortune magazine article in December 2001 as “probably the best single measure of where valuations stand at any given moment.”
The indicator has its flaws, including GDP not counting income earned overseas and US-listed companies not necessarily contributing to the US economy.
But it has a strong track record of predicting downturns — for example, it surged to 118% just before the dot-com bubble burst in 2000, and it topped 100% before the 2008 financial crisis.
“Nearly two years ago the ratio rose to an unprecedented level,” Buffett said in the Fortune article. “That should have been a very strong warning signal.”
The Buffett indicator sat at a historic high on Thursday, reflecting the US stock market’s rapid rebound since the coronavirus sell-off and the 4.8% slump in annualized GDP last quarter. Its current level is well above the average reading over the past 20 years.
Several market commentators have questioned whether US stocks are overvalued in light of slowing economic growth, surging unemployment, and other alarming data in recent weeks. The latest Buffett-indicator reading is likely to add more weight to their worries.
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