Warren Buffett's favorite stock-market indicator hits record high, signaling a crash could be coming
Two crossed lines that form an 'X'. It indicates a way to close an interaction, or dismiss a notification.Warren Buffett's preferred stock-market gauge hit a record high, signaling stocks are overvalued and a crash could be coming.
The so-called "Buffett Indicator" takes the combined market capitalizations of a country's publicly traded stocks and divides it by quarterly gross domestic product. Investors use it to gauge whether the stock market is overvalued or undervalued relative to the size of the economy. Buffett, a billionaire investor and the boss of Berkshire Hathaway, described it as "probably the best single measure of where valuations stand at any given moment" in aThe indicator has its flaws, including GDP not counting income earned overseas, and US-listed companies not necessarily contributing to the US economy.
Yet it has a strong track record of predicting future downturns. For example, it surged to 118% just before the dot-com bubble burst in 2000, and topped 100% before the 2008 financial crisis. "Nearly two years ago the ratio rose to an unprecedented level,"Buffett said in the 2001 Fortune article. "That should have been a very strong warning signal."
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