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Warren Buffett 's Preferred Stock Market Indicator Hits The Edge Of The Internet Bubble
The famous businessman Warren Buffett's long-standing preferred stock market price measure flips overvalued.
Yazar: Tom Roberts
Yayınlanma: 21 Ağustos 2020 21:01
Güncellenme: 21 Kasım 2024 10:58
Warren Buffett 's Preferred Stock Market Indicator Hits The Edge Of The Internet Bubble
The famous businessman Warren Buffett's long-standing preferred stock market price measure flips overvalued. The ‘Buffett Indicator’ as it’s called in Wall Street circles — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is at its highest level since before the internet bubble crash in 2000. Currently, the ratio of 1.7 is some 70% above its historical average of one.
Right before the financial market crisis, Existing Equity Analysis pointed out that the figure stood at 1.71—or that the business was overvalued by 71 per cent.
“Normally, this ratio is around 1, meaning that total market cap of all U.S. stocks generally equals annual U.S. GDP. When stocks are considered to be fundamentally overvalued, the ratio increases to 1.3 (so total stock market capitalization is 30% larger than U.S. GDP),” says Sevens Report Research manager Tom Essaye.
With Fed inflation unchecked, feeding fresh record highs — and the US-induced pandemic. GDP to plunge — it is no wonder that the Buffett Indicator is blinking bright.
“What does that mean for us? It means stay long stocks in longer-dated accounts, and make sure you own assets (such as a house, etc.). But it also means this asset inflation cycle better not stop, because as the 1.7 times total market cap to GDP ratio tells us if asset inflation stops, it’s a long, long way down to fundamental support,”Essaye says.
It is far from certain that this measure being overheated indicates that markets are headed towards a short-term collapse. Note, a market may stay overvalued for a while as long as investors feel that it is indeed undervalued. What it might imply is that if one is in a spot to avoid gaining back places in the portfolio at the time, it might not be such a terrible thing.
“Part of the reason why we have paired back modestly some of our positions in equities is because of concerns about valuations here. But I would also say this is a different market than what we saw during the dot com bubble. These are companies that are making earnings and increasing their earnings. Apple is one example of that. We’re not in the same kind of extended valuation scenario we were back in the dot com bubble,”said State Street Global Investors Deputy global CIO Lori Heinel.
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