‘Buffet Indicator’ Signals Potential Stock Market Crash On Horizon
Warren Buffett’s name is synonymous with the ebbs and flows of the stock market. Many financial experts believe that a stock market crash is looming due to the economy “overheating.” As CEO of Berkshire Hathaway, it is Buffett’s job to forecast both financial doom, as well as financial bliss. Now, investors all over the world at taking heed in a famous metric that both Buffett and Berkshire Hathaway use as a method for predicting the markets.
The “Buffett indicator,” a term famously coined by Berkshire Hathaway, is a simple metric that is used by not only Berkshire Hathaway, but investors and business moguls worldwide to predict the future of the global economy. The “Buffet indicator” is simple in execution. One merely has to divide the total market capitalization of the total of U.S. Stocks by the most current GDP.
Buffett has described the calculation as “the single best measure” in predicting the stock market’s future health.
The important indicator works within percentile margins. Typically, “Buffett indicator” sums in the sub-90% range indicate that stocks are in a “buy” state. Above 100% reveals a stock market boasting expensively priced shares. During the dot-com bubble, Buffett’s indicator was running near 150%. This preceded a well-known economic crash.
The new “Trump economy” has both the GDP and stock market sizzling, so it is no surprise to learn that the “Buffett indicator” is also running at a furious high percentile, 149%. This is 4% higher than the dot-com “Buffett indicator” total.
The inflated indicator number would assume the position of a stock market crash being on the horizon? Well, that’s not entirely accurate, appropriate perspective in these cases is always essential.
First, a “Buffet indicator” may reveal low priced, or high priced, stocks. Typically, it is accurate in assessing such dynamics. But the indicator does not determine the depth of either. Such lack of depth means that low priced stocks could go lower, the indicator doesn’t have a stopping point set in its calculations. Second, a raging stock market, just like a cheap stock market, are both relatively obvious happenings. The stock market is surging; stock prices are high, that’s obvious to any investment layman. The point being, what goes up in the market, must eventually come down.
When will the stock market temper itself and will that “tempering” be a complete stock market crash? That remains to be seen. Recent positive jobs reports and the potential for more positive jobs reports likely indicate increased interest rates over the next few years as the Fed attempts to throttle the economy. This alone could have detrimental effects across global markets.
Adverse conditions such as a failure to denuclearize North Korea, or coming up short on global Tariff negotiations, are also potential scenarios that could wreak havoc on our economic livelihood. It is always best to be prepared for a stock market crash and consider all the evidence as a whole, rather than a single metric, such as the “Buffett indicator.”
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Author: Jim Satney
PrepForThat’s Editor and lead writer for political, survival, and weather categories.