Market Watch: Warren Buffett Said This Metric Signaled the 2001 Crash - Now It's Sounding the Alarm on Global Markets

Article by Shawn Langlois in Market Watch

Warren Buffett once wrote that investors would have seen the dot-com crash coming from a mile away had they paid attention to what he described in a Fortune article in 2001 as “probably the best single measure of where valuations stand at any given moment.”

Known in investing circles as the “Buffett Indicator,” the measure is simply the total market cap of all U.S. stocks relative to the country’s GDP. When it’s in the 70% to 80% range, it’s time to throw cash at the market. When it moves above 100%, it’s time to lean toward risk-off.

Apply that yardstick worldwide, and, as you can see by this chart from Die Welt market analyst Holger Zschaepitz, a sell signal is flashing.

Over the past two decades, global markets have taken big hits on three occasions after the ratio broke into triple digits — In 2000, 2008 and again in 2018.

Meanwhile, drilling down into the market in the U.S., where stocks are holding up strong in the face of the coronavirus pandemic, shows the indicator is ...

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