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The So-Called 'Buffett Indicator' Hits All-Time High

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SPY) was up another 1% on Wednesday to new all-time highs, while the underlying U.S. economy continues to struggle with a COVID-19-driven recession.

BRK-A) (NYSE: BRK-B) CEO Warren Buffett suggests the stock market is currently extremely overvalued.

Buffett indicator” is also known as the market capitalization-to-GDP ratio. The metric earned its nickname after Buffett once said it’s “the best single measure of where valuations stand at any given moment.”” data-reactid=”30″>What Is The Buffett Indicator? The so-called “Buffett indicator” is also known as the market capitalization-to-GDP ratio. The metric earned its nickname after Buffett once said it’s “the best single measure of where valuations stand at any given moment.”

The Buffett indicator is calculated by dividing the total value of all stocks in the U.S. market and by the gross domestic product of the U.S. Traders typically use the Wilshire 5000 Total Market Index as a measure of total U.S. market cap.

Forbes article in which Buffett discussed investing strategy. In the interview, Buffett was discussing a long-term chart of the Buffett indicator such as the one below.” data-reactid=”36″>His famous quote comes from a 2001 Forbes article in which Buffett discussed investing strategy. In the interview, Buffett was discussing a long-term chart of the Buffett indicator such as the one below.

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“The chart shows the market value of all publicly traded securities as a percentage of the country’s business — that is, as a percentage of GNP,” Buffett said. “The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.”

The good news for investors is that there are limitations to what the indicator means about the stock market. The indicator isn’t a sign of an imminent market sell-off, as suggested by the fact it has been historically high for several years now.

Is Buffett Selling Banks, Buying Gold A Warning Sign For Investors?” data-reactid=”56″>Related Link: Is Buffett Selling Banks, Buying Gold A Warning Sign For Investors?

“Nearly two years ago, the ratio rose to an unprecedented level. That should have been a very strong warning signal,” he said.

recently discussed the implications of new record highs for the Buffett indicator.” data-reactid=”59″>Brad McMillan, CIO of Commonwealth Financial Network, recently discussed the implications of new record highs for the Buffett indicator.

“Once you get above the highest levels of previous history—which in both cases are those of the dot-com boom—you have to ask how much higher you can get,” McMillan said.

“All-time highs are great, and they often lead to further highs. But they can also signal increased risk.”

Image credit: Fortune Live Media, Flickr

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