Warren Buffett’s favorite market indicator hits 13-year high, indicating global stocks are most overvalued since financial crisis

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  • Warren Buffett’s favorite market gauge has climbed to its highest level since October 2007, suggesting that global stocks are the most overvalued since the financial crisis.
  • “The Buffett indicator is sounding the alarm,” tweeted market analyst Welt Holger Zschaepitz. “The ceiling of the world mkt stock has now exceeded 120% of world GDP, and therefore the same level as before the crash of 2008.”
  • Buffett described the indicator in 2001 as “possibly the best single measure of valuation status at any given time.”
  • The famous investor said that “it should have been a very strong warning signal” when the indicator hit a new high before the dot-com bubble burst.
  • Visit the Business Insider homepage for more stories.

Warren Buffett’s favorite market indicator hit a 13-year high on Sunday, indicating that global stocks are the most overvalued since the financial crisis and ripe for a correction.

The global version of the “Buffett Indicator” takes the combined market capitalizations of publicly traded stocks around the world and divides it by global GDP. A reading north of 100% suggests that the global stock market is overvalued relative to the global economy.

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The indicator climbed above 121% last weekend, according to Bloomberg data, marking its highest level since October 2007. Market analyst Welt Holger Zschaepitz reported the disturbing milestone in a tweet.

“The Buffett indicator is sounding the alarm,” he said. “The ceiling of the world mkt stock has now exceeded 120% of world GDP, and therefore the same level as before the crash of 2008.”

Buffett deceived the indicator in a 2001 Fortune article. Billionaire investor and CEO of Berkshire Hathaway described it as “possibly the best single measure of where valuations are at any given time.”

It “should have been a very strong warning signal” when the gauge hit an all-time high shortly before the dot-com crash, he added.

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However, the gauge is far from perfect. For example, it compares current valuations of stocks to last quarter’s GDP, and there are significant variations in the quality and frequency of GDP data from country to country.

Additionally, the coronavirus pandemic has triggered widespread economic restrictions that have artificially depressed GDP in recent months. Equities have also benefited from extraordinary stimulus efforts from governments seeking to consolidate their economies as they weather the current crisis.

Here is the global version of the Buffett indicator:

GlobalBuffettIndicator_110121





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