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

davfor

Checking up on a famous indicator.......

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.

Historically, the Buffett indicator average has been between 93% and 114%. The ratio peaked at 107.5% at the peak of the housing bubble in 2007 and at 139.5% during the dot-com bubble in 2000. In 2020, the Buffett indicator has spiked to new all-time highs of 182.7%, and it continues to climb higher with each new stock market high.

Benzinga’s Take: Even if the stock market is overvalued, it doesn’t mean a sell-off is imminent. However, it does mean that investors should keep that stretched valuation in mind when assessing risk and balancing a portfolio accordingly.

https://finance.yahoo.com/news/called-buffett-indicator-hits-time-211520943.html

davfor

Here is an article that discusses factors that may need to be considered to properly interpret this indicator today.

Why Is The Buffett Indicator Less Meaningful Now?

The first argument is that the current Buffett Indicator reading includes the very steep GDP drop that occurred during Q2. Almost all analysts forecast that this GDP drop will not be a lasting one and that the US economy will fully recover in the not-too-distant future. The current GDP reading is thus artificially low due to the pandemic impact during the most recent quarter.

On top of this issue, there are other, more structural and long-term reasons why the Buffett Indicator reading maybe isn't as meaningful as it used to be.

1.Tax Rates.
2. More overseas revenues and profits
3. Changes in the industries that make up the US market capitalization
4. Interest rates and inflation are lower
5. Buffett himself seems to have lost confidence in the indicator

https://seekingalpha.com/article/4371273-buffett-is-genius-investor-is-why-you-should-forget-indicator

Shostakovich

I'll add to this that a large proportion of revenue in the S&P 500 comes from overseas.

One will occasionally come across the argument (not saying I buy it, BTW) that there is little reason to have a heavy concentration in international stocks, since so much of the S&P500's revenues derive directly and indirectly from overseas markets.