Stock Market At Levels That Warren Buffett Once Called ‘Playing With Fire’ | Global News Avenue

The stock is trading at an all-time high, which might be cause for concern if you follow the valuation metrics once favored by one of the world’s most famous investors: Warren Buffett.

The U.S. market capitalization to GDP ratio, or what is known as Buffett Indicatorhovering around 200%, a level Buffett likened to “playing with fire” in a 2001 article wealth.

Calculations of this ratio vary due to the difficulty in determining the value of the entire U.S. stock market. Some expect the figure to be 208% by the end of the third quarter. one Investment Encyclopedia Calculations using GDP data from the Bureau of Economic Analysis and market capitalization data from SIFMA, the securities industry trade group, put it just under 200%.

Regardless, the ratio is at a level that Buffett said two decades ago was worrisome. “About two years ago, this ratio rose to unprecedented levels,” he wrote in 2001, referring to dotcom bubble. “That should be a very strong warning sign.”

The inflated market value of Buffett’s Berkshire HathawayBRK.A; BRK.B)already Selling stocks in recent months and increase its cash reserves.

What is the Buffett indicator?

In 2001 Buffett was technically referring to the total stock market value compared to the total value of the U.S. stock market gross national product (GNP), a measure of economic activity slightly different Quoted from the wider gross domestic product (gross domestic product). Today, as has been the case historically, the difference is small – just $15 billion, or 0.05% of GDP.

Buffett acknowledged that the ratio “has certain limitations.” Still, he calls it “probably the best single indicator of the level of valuations at a given moment.”

The indicator last hovered around the 70% to 80% level, which Buffett said in 2001 could be a good entry point for stocks in 2010 and 2011 as stocks were recovering from the 2008 crash.

What stocks is Buffett investing in?

Buffett’s Berkshire Hathaway has boosted cash reserves to record levels More shares sold than boughtespecially in some of the biggest positions like Apple (AAPL) and Bank of America (Buck), in recent quarters.

the company’s More than $320 billion in cash The equivalents on hand and the continued sales of shares suggest Buffett may be hesitant to pour more money into a market that appears overvalued or to lay the groundwork for a potential acquisition. Buffett has previously said Berkshire would be open to such deals, and the cash would allow Berkshire to acquire all but about 25 of the most valuable U.S. companies. . wall street journal Recently reported.

However, Bloomberg Columnist Nir Kaissar recently wrote that given Buffett’s track record of favoring the long-term view, withdrawing cash from the market could be a sign of his belief that the market’s long-term returns are suboptimal, rather than a prediction of upcoming returns. Economic downturn.