The man is Warren Buffett.
AP Images.
Warren Buffet's favorite market gauge climbed to 211% this week, signaling a crash and sounding the alarm on US stocks.
The "Buffett indicator" takes the combined market cap of all actively traded US stocks and divides it by the latest quarterly figure for gross domestic product. The stock market's valuation is compared to the size of the economy by investors.
On Tuesday, the Wilshire 5000 Total Market Index hit a new high of $48.98 trillion, following the record closes for the S&P 500 and the Dow Jones. The latest estimate for third-quarter GDP is $23.20 trillion, putting the Buffett indicator at 211%.
The gauge was well above its 185% level in the second quarter of 2020 when the Pandemic was in full swing.
In 2001, the indicator was described as the best single measure of where valuations stand at any given moment. He noted that the yardstick should have been a strong warning signal when it went up during the dot-com bubble. When the metric approaches 200%, investors are playing with fire.
The preferred gauge is not flawless. It compares the stock market's current value to a GDP reading. GDP excludes overseas income, whereas US companies' market caps reflect the value of both domestic and international operations.
Supply chains have been disrupted and GDP has been depressed since early 2020. Government officials and the Federal Reserve have taken unprecedented steps to support the people and businesses affected by the economic downturn. The factors may be inflating the readings.
There are many people who think that stocks are overpriced and at high risk of a downturn. The investor of "The Big Short" warned last year that the stock market was about to crash and that the "mother of all crashes" was coming. Similarly, Jeremy Grantham has found a bubble that he expects to burst spectacularly.
The St. Louis Fed has a version of the Buffett indicator.
St. Louis Fed.
Business Insider has an original article.
