🦧 his indicator says "not bad"
🦧 his indicator says "not bad"
total divided by total
the stock-market-cap-to-gdp ratio, also commonly called as the “buffett indicator”, (named after warren buffett who popularized the use of the metric) is one of the simplest ways to measure valuation
the formula is:
total us stock market / gross domestic product (gdp)
how to measure
the wilshire 5000 index is one of the most common ways to quantity the aggregate value of the us stock market
a 1-point increase in this index corresponds to a roughly $1b increase in us stock market cap (the index currently stands at ~39k, down from 48k in oct-21)
gdp is measured quarterly by the us bureau of economic analysis
the latest release was on oct. 27th for q3 '22 and indicated that the current-dollar gdp increased 6.7% at an annual rate "to a level of ~$26t" (annualized)
currently the ratio stands a little above 150%
that would make sense
gdp is current at best, almost always based on past performance anytime we’re looking at the latest gdp measurement, while the stock market is supposed to reflect future growth (or sum of all future earnings implied in the stock price, depending on who you’re talking to) of public companies
historically, though, we have seen levels below 100%, but typically in the post cold war & post stagflation era, and especially recovering the ‘07-’08 financial crisis, 100% or above was common
warren buffett’s known for saying “anything above 200% and we’re playing with fire”
so, despite all the craziness and pessimism going on, one could say that the current 164% reading tells us that the us stock market is neither too cheap nor expensive
this is just one indicator though – always make sure you have multiple angles when you evaluate markets!
💡 something im thinking about
i still wouldn’t buy it after the black friday sale price, but the idea of the plunge gives me happiness just thinking about it (click image)
that's all, folks 🐒
