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• Buffett said the gauge spiking is a "very strong warning signal" of a future market crash.
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Warren Buffett's favorite market indicator hit 200% on Tuesday, signaling stocks are massively overpriced and a crash may be looming.
The "Buffett indicator" takes the combined market capitalization of all publicly traded US stocks, and divides it by the most recent quarterly figure for gross domestic product. Investors use it as a rough gauge of the stock market's valuation relative to the size of the economy.
The $4 climbed as high as $44.3 trillion on Tuesday, while the $4 for first-quarter
Buffett trumpeted his namesake gauge in a $4 in 2001, calling it "probably the best single measure of where valuations stand at any given moment."
The billionaire investor and
However, the measure has its flaws. For example, it compares the stock market's current value to the previous quarter's GDP. Moreover, US-listed companies don't always contribute to the American economy, and GDP ignores overseas income.
The pandemic has also disrupted economic activity and depressed GDP since last spring, inflating the Buffett indicator's readings. The gauge may well retreat from record levels if the economic reopening juices GDP this quarter.
Here's the $4 (both market cap and GDP are indexed to the fourth quarter of 2007):