Certain research and projections of past performance may conclude stocks are going up. Nonetheless, there are valuation metrics that offer warning signals of a possible future storm. These warning signals suggest that now may be a wise time to hunker down.
One valuation metric, for example, is the Buffett Indicator. Berkshire Hathaway CEO Warren Buffett once called it, “probably the best single measure of where valuations stand at any given moment.”
Currently, the Buffett Indicator, which is the ratio of the total market capitalization over gross domestic product, is over 167%. Specifically, at market close on Thursday, the Total Market Index, as measured by the Wilshire 5000, is at $44.38 trillion. This is over 167% of the last reported U.S. GDP of about $26.53 trillion.
A fairly valued market is a ratio somewhere between 75% and 90%. Anything above 115% is considered significantly overvalued.
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