The market indicator favored by "stock god" Buffett soared to a record high of 205% this week, indicating that the current stock valuation is too high and a crash may be imminent.
The so-called "Buffett Index" refers to the ratio of the total market value of U.S. stocks to U.S. GDP, and is widely used by investors and researchers to measure whether U.S. stocks are overheated. Buffett once described this indicator as "the best single indicator to measure the level of valuation at any moment."
With the U.S. stock market hitting a new high on Wednesday, the Wilshire 5000 Total Market Index has approached $46.69 trillion, and the second quarter GDP of the United States is expected to be $22.72 trillion, the ratio of the two reaching 205%. , Much higher than the 187% in the second quarter of last year, when the US epidemic was in full swing and GDP fell by about 15%.
In 2001, Buffett praised the indicator named after him in an article in Fortune magazine, saying that it "may be the best single indicator of valuation at any time."
The well-known investor and CEO of Berkshire Hathaway added that when the indicator soars to record highs during the dot-com bubble, it should be a “very strong warning sign” that heralds an impending crash. . Before the outbreak of the global financial crisis, this indicator also rose sharply, making it a useful tool for predicting economic recession. Before these two crashes, the indicator did not exceed 150%.
However, this indicator is far from perfect. For example, it compares the GDP of the previous quarter with today's stock market value. GDP does not include overseas income, and the market value of American companies reflects the value of their domestic and international businesses.
In addition, since last spring, the epidemic has disrupted economic activities and depressed GDP. At the same time, it has also prompted the U.S. government to support businesses and support the market in the process. Therefore, the reading of the "Buffett Index" may be artificially exaggerated and may decline with the economic recovery and the withdrawal of corporate aid.
The Buffett indicator is not the only one that predicts an imminent crash in US stocks. Michael Burry, the protagonist of the movie "Big Short", has repeatedly warned this year that the US stock market is "dancing on the tip of a knife" and that a "mother of all crashes" is about to crash. Legendary investor and GMO co-founder Jeremy Grantham (Jeremy Grantham) also sounded the alarm about an "epic bubble" that he expected to burst at an alarming rate.