Buffett indicator is the ratio of total market capitalization of equities to GDP (gross domestic product).
This indicator of market valuation became known after Warren Buffett said in Fortune Magazine interview that this characteristic is one of the best measures of stock market. It was in 2001. More than 20 years later some investors still believe that this indicator can be predictive on how the stocks will move in the future.
Formula of Buffett Indicator
To define Buffett Indicator, you have to take the total value of all publicly traded stocks in any given country and then divide it by GDP of that country.
Buffett Indicator = Willshire 5000 Capitalization / US GDP x 100
Buffett Indicator Today
Stock market is significantly overvalued according to Buffett Indicator which is roughly 160.1% today.
This is how you should interpret Buffett Indicator:
|Buffett Indicator||Stock Market Valuation|
|less than 77%||very undervalued|
|more than 143%||significantly overvalued|
|Buffett Indicator Today = 160.1%||significantly overvalued|
Historically Buffett Indicator is howering around 100% mark. It was below 30% during Great Depression and for a short period of time in 1982. Highest marks were reached in 1929 and before dotcom crash in 2000. Today’s value of Buffett Indicator shows that stocks are not cheap.