- Warren Buffett's most popular stock index has risen to a record 170%, highlighting the strong gap between sky-high US stock prices and the pandemic-hit economy.
- The "Buffett Indicator" divides the combined market capitalization of listed US companies by the quarterly GDP.
- "It's probably the best measure of where the ratings are at any given time," Buffett said wrote in an article in Fortune magazine in 2001.
- The billionaire and Berkshire Hathaway chief added that the indicator that rose before the dotcom crash should have been a "very strong warning signal".
- You can find more stories on the Business Insider homepage.
Warren Buffett's most popular market indicator has risen to a record high, underscoring the remarkable gap between the booming US stock market and the depressed domestic economy.
The so-called "Buffett indicator" Takes the combined market cap of a country's publicly traded stocks and divides it by the quarterly gross domestic product. Investors use it to measure whether the stock market is over- or undervalued in relation to the size of the economy.
The Wilshire 5000 Total Market Index was estimated closed at around $ 33 trillion on Wednesday, while the official forecast for US GDP in the second quarter released on Thursdayis $ 19.4 trillion. Based on these numbers, the Buffett indicator is now around 170%, a historic high.
Buffett described the metric in a Fortune Magazine article in December 2001 as "probably the best single measure of where the ratings are at any given time".
The famous investor and CEO of Berkshire Hathaway added that the quota that reached a record high during the dotcom boom should have been "a very strong warning sign" of the impending crash.
The Buffett indicator has its shortcomings, including the fact that it compares current market capitalizations with previous quarter GDP. GDP also does not take overseas earnings into account, and US-listed companies do not necessarily contribute to the US economy.
Downtimes and home orders during the coronavirus pandemic are also responsible for the sharp decline in GDP in the second quarter, which means that the top of the Buffett indicator could prove to be a temporary slip.
However, the measure has a solid track record in predicting past downturns. It rose before the dotcom bubble burst and rose in the months leading up to the 2008 financial crisis.
Here is the St. Louis Fed version of the Buffett indicator (Both market capitalization and GDP are indexed to the fourth quarter of 2007):
St. Louis Fed
(tagsToTranslate) Finance (t) Markets (t) Investing (t) Warren Buffett (t) Berkshire Hathaway (t) Buffett Indicator (t) Stocks (t) Pandemic (t) Bubble