Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead
Today – Apple became the first public company worth over $1 trillion dollars. . .
Thanks to very low interest rates – the company’s piling on debt and buying their own shares back – shrinking the float.
And because of a worldwide rush into mutual funds and exchange traded funds (ETF’s) – there’s crazy demand for Apple shares.
The king of ‘buy and hold’ investing and a Champion of equities – Warren Buffet – must a have grin on his face from ear to ear. Because Apple’s surge just netted him a huge profit for his company – Berkshire Hathaway – of over $2.6 billion.
Many, now, may be thinking that they should buy Apple and other such stocks – right?
Well, not exactly.
Because according to this favorite Buffet metric – the market looks extremely overvalued and the future looks scary.
The Market Cap-to-GDP metric is a long-term value indicator. And it’s become popular recently thanks to Warren Buffet.
During an interview in 2001 with Fortune – he claimed that this indicator is “probably the best single measure of where valuations stand at any given moment.”
And what his favorite indicator’s showing us today is that stocks are more over-valued than they’ve ever been. . .
So – what is the Market Cap to GDP – aka the ‘Buffet Indicator’?
It’s easy. Just calculate the total market value of all stocks outstanding and divide it by the nations GDP.
When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.
And when the ratio is less than 100% – it means the opposite. That stocks are considered undervalued and historically have more upside.
I look at it this way: when the ‘Buffet Indicator” is more than 100%, the stock market is negatively asymmetric (high risk, low reward). And when it’s less than 100%, the stock market is positively asymmetric (low risk, high reward).
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