Warren Buffett’s Favorite Valuation Metric Is Sounding An Alarm

Warren buffett

Photographer: Paul Morigi / Getty Images

With US stock indices hitting new highs again this week, one of Warren Buffett’s most famous quotes comes to mind: Investors should “be scared when others are greedy.”

Any Buffett disciple who fixes on the billionaire investor’s favorite market valuation metric these days may have the urge to scream in terror.

The “Buffett gauge” is a simple relationship: the total market capitalization of US stocks divided by the total dollar value of the nation’s gross domestic product. It first crossed its previous peak of the dot-com era in 2019. Still, it has been trending up for decades, and if there is one mantra investors love even more than Buffett’s, it is “the trend is their friend”.

Yet in recent weeks, even that long-term trend fails to justify the metric’s frothy appearance. With us Market cap More than double the estimated GDP level for the current quarter, the index has risen to the highest reading above its long-term trend, according to a blog analysis. Current market valuation, suggesting a “strongly overvalued” situation.

Buffett indicator

Source: CurrentMarketValuation.com

Of course, with the Federal Reserve holding rates near zero and buying bonds for the foreseeable future, and an abundance of savings and fiscal stimulus to unleash blockbuster growth in GDP and corporate earnings, it’s fair to wonder if this is another. of the many. false alarms that have been sounded for the last decade.

“It highlights the remarkable mania we are witnessing in the US stock market,” said Michael O’Rourke, chief market strategist at JonesTrading. “Even if you expected those (Fed) policies to be permanent, which they shouldn’t be, it still wouldn’t justify paying twice the 25-year average for shares.”


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