The "Buffet Indicator" is Flashing Warning Signals About the Market
The "Buffet indicator" analyzes the relationship between combined market capitalizations of stocks and divides it by global GDP. If this relationship exceeds 100 percent it could signal bad news in the near future for markets. With the indicator reaching a 13-year high on Tuesday, it signals that stocks are overvalued and could be ready for a significant correction.
Bloomberg data revealed that the indicator reached 121 percent last week, its highest mark since October 2007. "Buffett indicator sounds the alarm," analyst Holger Zschaepitz said. "Global stock market cap has now topped 120% of global GDP, and thus the same level as before the crash in 2008."
Buffett has described the indicator as "probably the best single measure of where valuations stand at any given moment." He added that it "should have been a very strong warning signal" when it surged to a record high right before the dot com crash.
However, it's important to note that the indicator uses current stock valuations with lagging GDP by one quarter. Furthermore, GDP data varies across different countries with different metrics.
It's also important to note that significant economic restrictions have blunted GDP in recent months. Stocks have surged due to unprecedented efforts from central banks to shore up their economies.