Stocks are still too expensive – the bear market is alive and well

Stock markets have already taken a deep dive this year amid the looming recession, energy problems and war in Europe. Billions of stock market fortunes have already been wiped out. And flushed the excessive liquidity surpluses of the past few years out of the financial system. Or not?

Warren Buffett’s well-regarded Buffett Indicator disagrees.

Buffett indicator at extreme levels still shows massive overvaluation


What is the Buffett Indicator?

The Buffett indicator is a metric that reflects the overall assessment of the US stock market. The indicator is expressed as the total value of listed US stocks as a percentage of US GDP. It is also known as the market capitalization to GDP ratio.

Warren Buffett first spoke publicly about this stock market valuation indicator in an article in Fortune magazine in 2001. Buffett used the ratio to reflect the overall valuation of the market as a percentage of GDP and evaluated how the ratio had changed over the past 80 years. had changed. Today, gross domestic product (GDP) rather than gross domestic product (GDP) is used to reflect economic activity.

However, the buffet indicator can be calculated for any country with reliable data or even used to assess the global stock market.

How to calculate the Buffett indicator?

The ratio is calculated by simply dividing a country’s total market capitalization by the country’s GDP for the last 12 months.

The Buffett indicator is most often calculated using the US Wilshire 5000 index, a market capitalization-weighted index of the 5,000 most valuable publicly traded companies. The choice of index is not critical as long as it includes the majority of listed companies and is used consistently.

However, Warren Buffett himself initially used the total value of US stocks as published by the Federal Reserve Economic Data (FRED) and US GNP.

When does the Buffett indicator give which signals to invest?

Taking this indicator to the world in 2011, Warren Buffett explained that a ratio of 0.70 to 0.80 is a good level to buy stocks, and that a ratio of 2.00 is “starting with fire.”

It means:

  • A reading below 1 indicates an undervalued stock market relative to the underlying economy. Shares are good deals.
  • A value of 1 indicates that the stock market and the economy are in lockstep and everything is fine.
  • A reading above 1 indicates an overvalued stock market relative to the underlying economy. Stocks are expensive.

It peaked at just below 1.00 in the 1960s, approached 2.00 in 2000 and above 2.83 in 2021. The lows in the 1970s and 1980s were just below 0.40, in 2009 the indicator fell to 0 .80 and in March 2020 to around 1.66. These levels clearly show that the indicator is trending upwards over time – as the liquidity of the fiat money system increases, the overvaluation of stocks increases.

BUT…Extreme values ​​like these are dangerous

The indicator currently stands at 2.44 based on the Fed’s assessment of US stocks.

This is a real hot potato!

And that means: despite the downturn in US stock markets (for example, the S&P500 has lost more than 22% this year) and stock markets worldwide, US stocks are still massively overvalued relative to actual US economic performance. Please don’t deny it!! The bear market is not over yet.

In addition, globally, the ratio between market value and world GDP is 1.42. This is an all time high!!!

Conclusion: Need I say more?

I stand by the advice I’ve been giving you for some time now: hedge with gold and other precious metals. Stick to selected value stocks and cheap commodity markets.

And forget all the bullshit about growth stocks. Elon Musk also only boils with water, and if he runs out of electricity, he runs out of crypto.

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