Buffett Indicator
The Buffett Indicator is a broad valuation method used for the US stock market, calculated by dividing the total market capitalisation of publicly traded stocks over GDP, expressed as a percentage.
For example, if the total market cap of stocks was double the annual GDP of the US economy, the Buffett Indicator would be said to be 200 per cent.
As noted at 'Longtermtrends.com', Warren Buffett popularised the measure in 2001 by describing it in Fortune magazine as the single best measure of valuation for any given point in time, effectively calculating a sort of 'price to sales' ratio by comparing the market cap of stocks to annual economic output.
100 per cent was previously considered to be something of a balanced market valuation, and 120 per cent a significant overvaluation.
This week the Wiltshire 5000 to GDP proxy indicator hit an unprecedented 238 per cent, so I'm not quite sure what you'd call that.
Source: longtermtrends.com
You could variously make a case for the impacts of low interest rates, technology and AI efficiencies, and changing trends in corporate profitability.
But still it'd be a case of 'no crying in the casino' if valuations fell 10-20 per cent from here.
Look at some of what's been going on in recent days.
We now appear to be headed for no fewer than three US$1 trillion plus IPOs (SpaceX, which reportedly could float at a valuation of anywhere up to $2 trillion, ChatGPT, and Anthropic).
At the first signs of stock market volatility the President posited that the US government could be looking to take a stake in AI companies, further fuelling the remarkable short-term bullish vibes.
Government involvement could be seen as a typical cyclical top signal of extreme late-cycle euphoria, but who knows?
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