As global stock markets climb, Warren Buffett’s most relied upon stock market valuation indicator, the Buffett Indicator (i.e., total stock market capitalization/GDP), has soared to a record high level, reflecting that global stock markets are severely overvalued and could burst into flames in the coming months.
Foreign media reported that the global version of the Buffett indicator has soared to 123%, surpassing the 121% during the dot-com bubble and setting a new all-Time high. The indicator uses the total market value of publicly traded stocks worldwide, divided by global GDP, with a level of 100% or higher indicating that global stock markets have become overvalued compared to the world economy.
Warren Buffett, who described the indicator as “the single best indicator of stock market valuation at any given moment,” noted in 2001 that it reached record highs before the dot-com bubble burst and was “a very strong warning sign.
However, the indicator also has several drawbacks, such as comparing current stock market capitalization with past GDP data, which is not available for all countries on a regular, reliable basis.
The climb in the S&P 500 also reflects the fact that the new pneumonia has led to embargoes, business closures and travel restrictions that have dampened economic growth while government intervention has artificially pushed up the stock market.
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