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The global “Buffett indicator” jumped nearly 110%, signaling stocks are overvalued.
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Warren Buffett’s favorite gauge divides the total market capitalization of global stocks by global GDP.
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The spike in the indicator is a “very strong warning signal” for the stock market, Buffett said.
The global version of Warren Buffett’s favorite market gauge jumped nearly 110%, signaling that stocks around the world are overheated and could crash in the coming months.
The global “Buffett Indicator” takes the combined market capitalization of the planet’s publicly traded stocks and divides that figure by global GDP. A value above 100% suggests stocks are overvalued relative to the size of the global economy.
“Buffett’s crash indicator is ringing the alarm bells again after stocks soared too high this year,” said Welt market analyst Holger Zschaepitz. tweeted on Saturday, attaching a table showing the gauge. “Global stocks are now worth more than global GDP.”
Buffett defended the US version of his yardstick in a 2001 Fortune magazine article. The famed investor and CEO of Berkshire Hathaway called it “probably the best single measure of where valuations are at any given time.”
The billionaire noted that the indicator soared during the dotcom bubble, and said it should have been a “very strong warning signal” of impending doom. He added that buying shares when the gauge reads 70% or 80% would likely pay off, but doing so when the ratio approaches 200% would be “playing with fire”.
The global stock market still has some way to go before it hits that level, but the Buffett indicator for the US alone is currently showing 159%, according to analysis by Markets Insider. It has soared largely thanks to the S&P 500 and Nasdaq Composite gaining 13% and 29% respectively this year – but still remains well below its peak of more than 200% at the end of 2021.
Read the original article on Business Insider