Warren Buffett's favorite market indicator soars to 30-month high, signaling global stocks are overpriced
- Warren Buffett's preferred stock-market gauge hit a 30-month high this week, signaling that worldwide equities are overvalued and may be due for a correction.
- The global version of the "Buffett indicator," which compares the value of the world's stocks to global GDP, zoomed past 100% for the first time since February 2018.
- The milestone was first spotted by the Welt market analyst Holger Zschaepitz on Twitter.
- Buffett said in 2001 that when the indicator hit a record high in the months before the dot-com crash, it "should have been a very strong warning signal."
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Warren Buffett's favorite stock-market indicator climbed to a 30-month high this week, suggesting that worldwide stocks are overpriced and that a correction may be around the corner.
The global version of the so-called Buffett indicator passed 100% this week for the first time since February 2018. The milestone was first highlighted by the Welt market analyst Holger Zschaepitz on Twitter.
The gauge takes the combined market capitalizations of publicly traded stocks worldwide and divides it by global gross domestic product. A reading of more than 100% suggests that the global stock market is overvalued relative to the world economy.
Buffett, the billionaire investor who runs Berkshire Hathaway, praised the indicator in a Fortune magazine article in 2001, describing it as "probably the best single measure of where valuations stand at any given moment."
It "should have been a very strong warning signal" when it soared to a record high in the months before the dot-com bubble burst, he added.
However, the gauge has its fair share of flaws. For example, it compares current stock valuations to GDP in the past quarter, and not all countries provide regular, reliable GDP data.
The indicator's current level underlines the striking gap between sky-high stock valuations and depressed economic growth in countries around the world due to the coronavirus pandemic.
Stocks have benefited from aggressive intervention by governments and central banks to bail out companies and shore up markets.
Meanwhile, the global economy has suffered from authorities' efforts to combat the virus, including closing nonessential businesses, restricting travel, and encouraging people to stay at home.
The Buffett indicator for the US also soared to an all-time high during the pandemic — the main US stock indexes have almost fully rebounded from the coronavirus crash earlier this year, while GDP plummeted in the second quarter.
Here's the global version of the Buffett indicator:
