Are Stocks Overvalued? This Market Indicator Says So.
When the markets crashed earlier this year, you may have braced yourself for a bear market. With over 10 years of positive gains, a raging pandemic, and record unemployment numbers, plummeting stocks seemed to be a given. But much to everyone's surprise, the mid-March panic didn't last long. Skepticism about this quick V-shaped recovery probably has you wondering whether the market is overvalued, and whether a bubble is forming. Based on a favorite market indicator of superinvestor Warren Buffett, a pullback could be brewing -- and soon.
The stock market capitalization-to-GDP indicator, also known as the "Buffett indicator," looks at the value of the stock market relative to GDP. In a 2001 interview with Fortune, Buffett called this metric "probably the best single measure of where valuations stand at any given moment."
If this indicator trades under 100%, it suggests that the market's placing appropriate values on stocks. But when this indicator starts trading over 100%, you should start paying close attention.
Source Fool.com
