Warren Buffett Indicator - Indicating an Extremely Over-Valued Market
The Buffett Indicator has gained prominence as a long-term valuation indicator for stocks, largely due to Warren Buffett's endorsement.
Market Cap to GDP ratio
The Buffett Indicator has gained prominence as a long-term valuation indicator for stocks, largely due to Warren Buffett's endorsement.
In a Fortune Magazine interview back in 2001, Buffett referred to it as "probably the best single measure of where valuations stand at any given moment”.
The Wilshire 5000 is widely regarded as the definitive benchmark for the US equity market, aiming to measure the total market capitalization of all US equity securities with readily available price data.
By dividing this market index by the GDP (Gross Domestic Product), we can obtain a snapshot of the market's valuation in relation to the country's economic performance.
Use as an Indicator
Today the indicator is 2 standard deviations above the long term trend.
When the indicator reaches 2 standard deviations it has struggled to maintain that level.
The overall stock market has typically peaked at this level.
In 2000 and 2020 the U.S. stock markets peaked and fell precipitously.
Many strategists would consider current stock market levels as being over-valued.
Source: https://currentmarketvaluation.com/models/buffett-indicator.php
LPL 579422-1
DEFINITIONS
Gross Domestic Product (GDP) - The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well.
Wilshire 5000 Composite Index - The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States. As of December 31, 2019, the index contained only 3,473 components.[1] The index is intended to measure the performance of most publicly traded companies headquartered in the United States.
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