FX168 Financial News (Hong Kong)-with the arrival of the Jackson Hole central bank seminar, a key risk event this week, the rally of US stocks rushing to record highs has been suspended. On this occasion, some analysts pointed out that Warren Buffett's favorite market index reached 205%, indicating that the stock price is too high and a crash may be imminent.
The favorite market indicator of "stock god" Warren Buffett (Warren Buffett) has climbed to 205%, suggesting that the stock market is overvalued and a crash may be imminent.
The Buffett Index is the total market capitalization of all publicly traded stocks in the United States divided by the latest quarterly gross domestic product (GDP) data. It can be used as a rough measure of stock market valuations relative to the size of the economy.
The Wilshire 5000 general market index closed around $46.69 trillion on Wednesday, with the S & P and NasdaqThe index closed at a record high.
Meanwhile, the latest estimate for second-quarter GDP is $22.72 trillion, bringing the Buffett target to 205 per cent. That is up from 187 per cent in the second quarter of 2020, when the epidemic was in full swing and GDP fell by about 15 per cent.
In 2001, Buffett praised the measure that bears his name in an article in Fortune magazine, saying it "may be the best single indicator of valuation at any time".
This famous investor and Berkshire HathawayThe company's chief executive added that when the index soared to a record high during the dotcom bubble, it should be a "very strong warning sign" of imminent collapse.
The index also rose sharply before the global financial crisis, making it a useful tool for predicting recessions. On both occasions, the target was below 150%.
However, the indicator is far from perfect. For example, it compares the GDP of the previous quarter with today's stock market value. GDP also excludes overseas income, while the market capitalization of US companies reflects the value of their domestic and international operations.
In addition, since last spring, the epidemic has disrupted economic activity, depressed GDP and prompted the federal government to support businesses, propping up the market in the process. As a result, the Buffett index reading could be artificially exaggerated and could fall as the economy recovers and companies withdraw aid.
Buffett's indicators are not the only predictor of a painful sell-off. Michael Burry, an investor known as the "big short" investor, warned earlier this year that the stock market was "dancing on the tip of a knife" and that "the mother of all crashes" was coming.
Grantham, a market historian and co-founder of GMO, has also sounded the alarm about a "mature, epic bubble" that he expects to burst at an alarming rate.
Here is the St. Louis Fed's version of the Buffett index (both market capitalization and GDP are linked to the fourth quarter of 2007):
