Warren Buffett’s favorite market indicator rose to a 13-year high last weekend, signaling that global stocks are the most overvalued “and ripe for correction” since the financial crisis. This according to a recent article in Market’s Insider.
When this “Buffett indicator” —calculated by dividing the combined market capitalizations of publicly traded global stocks by global GDP—reaches 100%, it suggests that the global stock market is overvalued relative to the world economy. Bloomberg data shows that last weekend, the gauge exceeded 120%, its highest reading since October 2007.
In a 2001 Fortune article, Buffett described the indicator as “probably the best single measure of where valuations stand at any given moment,” adding that it “should have been a very strong warning signal” right before the dot-com crash.
That said, the article notes that the indicator is “far from perfect,” since it compares current stock valuations to the prior quarter’s GDP and, further, that there is “significant variation in the quality and frequency of GDP data across different countries.” Adding to the mix is the current artificial depression of GDP due to the coronavirus pandemic and the resulting economic restrictions along with a bolstering of stocks due to extraordinary government stimulus efforts.