Money & Markets: Reliable 'Buffett Indicator' Flashing Market Crash Warnings

Article by Eugene Townes in Money & Markets

If you’re invested in the stock market, there’s a good chance you are incredibly happy with how the last year has gone — but the so-called “Buffett indicator” is flashing some bad omens for Wall Street’s future.

The signal, named after Berkshire Hathaway’s co-founder and investor extraordinaire Warren Buffett, reflects the “Oracle of Omaha’s” simple approach to investing and stock valuation. It’s just the total stock market capitalization relative to U.S. gross domestic product.

Buffett sees a market correction happening when the indicator gets too top heavy, or when the market value of stocks are vastly outperforming the productivity of the companies that those stocks are based on. Historical data shows some validity to this argument.

The graph above shows how the Buffett indicator has dipped and rose again over the past 20 years up until 2017. Before the dot-com bubble crash of the early 2000s, the Buffett indicator showed U.S. market cap was at 146% of GDP, according to CCN. At the end of 2007, prior to the Great Recession market cap was 137% of GDP.

So what’s the Buffett indicator at now?

On the first trading day of 2020 the market cap hit a record-high 153%.

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