A closer look at Buffett Indicator: Will this time be different?
Buffett Indicator is the percentage of the total market cap relative to the US GDP. According to Warren Buffett, such an indicator is probably the best single measure of where valuations stand at any given moment.
How does the Buffett Indicator work?
In 2001, Warren Buffett said 75% to 90% are reasonable; over 120% suggests the stock market is overvalued.
As of Aug 28 2021, the Total Market Index is at US$ 46.88 trillion, about 206% of the US GDP, signaling the market is heavily overvalued.
Did Buffett Indicator work well?
Let's see the historical chart of the Buffett Indicator. The ratio reached 140% in 2000, portending the dot-com bubble which eventually burst. The NASDAQ fell by 75% from March 2000 to October 2002.
The ratio also reached 155% in Feb 2020, followed by the pandemic crash that caused the S&P500 Index to drop from 3393 to 2192, a 35% correction. However, stock market quickly bounced, doubling from the dip.
And when the ratio breaks 200%, we are witnessing history undoubtedly.
Will this time be different?
With interest rates at historic lows, there is a voice in the market that "this time is different".
Cathie Wood said: GDP statistics evolved during the Industrial Age and do not seem to be keeping up with the digital age. Thanks to productivity, real GDP growth probably is higher and inflation lower than reported, suggesting that the quality of earnings has increased significantly.
Overall, if the stock market is a game, you have to stay in the game before you beat the game. The Buffett Indicator can be a tool to relocate where we are in the stock market. It's never too late to do our due diligence and control the risk to gain a long-term return.
Do you think the Buffett Indicator is useful? Should we pay close attention or just ignore it? What should we do in response to such an indicator?
Rewards:
Click "Enter Now" to post before Sep 3, and based on the quality and originality,
5 mooers will win 2,000 points
10 mooers will win 1,000 points
Don't forget to click "Enter Now" to win!
How does the Buffett Indicator work?
In 2001, Warren Buffett said 75% to 90% are reasonable; over 120% suggests the stock market is overvalued.
As of Aug 28 2021, the Total Market Index is at US$ 46.88 trillion, about 206% of the US GDP, signaling the market is heavily overvalued.
Did Buffett Indicator work well?
Let's see the historical chart of the Buffett Indicator. The ratio reached 140% in 2000, portending the dot-com bubble which eventually burst. The NASDAQ fell by 75% from March 2000 to October 2002.
The ratio also reached 155% in Feb 2020, followed by the pandemic crash that caused the S&P500 Index to drop from 3393 to 2192, a 35% correction. However, stock market quickly bounced, doubling from the dip.
And when the ratio breaks 200%, we are witnessing history undoubtedly.
Will this time be different?
With interest rates at historic lows, there is a voice in the market that "this time is different".
Cathie Wood said: GDP statistics evolved during the Industrial Age and do not seem to be keeping up with the digital age. Thanks to productivity, real GDP growth probably is higher and inflation lower than reported, suggesting that the quality of earnings has increased significantly.
Overall, if the stock market is a game, you have to stay in the game before you beat the game. The Buffett Indicator can be a tool to relocate where we are in the stock market. It's never too late to do our due diligence and control the risk to gain a long-term return.
Do you think the Buffett Indicator is useful? Should we pay close attention or just ignore it? What should we do in response to such an indicator?
Rewards:
Click "Enter Now" to post before Sep 3, and based on the quality and originality,
5 mooers will win 2,000 points
10 mooers will win 1,000 points
Don't forget to click "Enter Now" to win!
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Jamesim :
earning_s : the market today is less likely to quickly collapse like it did in 2000
Bangaram :
WillPeeps : This is an obsolete indicator. Companies now trade internationally more than ever, so comparing market caps with US GDP Is nonsense
102723593 : Buy more to break this indicator...
Jackosen : S&P still continue to go up so this indicator don't seem to work.
NewBie2021 : This time is going to be different. Old school method doesn't work anymore.
xela888 : The Buffett indicator remains one of the tools at our disposal. However, I would argue there are many more companies listed on NYSE now than in 2000 or earlier giving rise to higher market capitalization and the GDP numbers have been suppressed due to the current pandemic. These two factors are probably what gave rise to the >200% ratio. Therefore, so long as we can make sense of what the indicator is telling us, it should be fine and there is no need to panic
greatest88888888 : In my opinion, this Buffett Indicator is a useful Chart because by dividing the total market cap with US GDP we can roughly know whether the market is overvalue or under value.
Imranm20 : As per my analysis, this indicator is not very relevant now due to hyper growth and businesses being more efficient meaning producing more with less.
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