Written by Dave Skarica at StockChartoftheDay:
Today we look at Market Cap to GDP better known as the Buffett Indicator . This Indicator compares the size of the economy towards the stock market. It predicted the 2000, 2007 and 2021 tops. It is now near nose bleed levels it only saw in 2021! Meaning stocks compared to the economy have never been more overvalued.
When this indicator is below 75 percent (meaning stocks are less than 3/4s of the economy) it is cheap and when it is above 100 percent and especially 130 percent it is expensive.
In 2000 this indicator hit 140 percent of GDP which at the time was an all time high , right afterwards the market entered a massive bust and bear market. In 2007 it again went to over 100 percent and the market topped and crashed into 2009. Then 2009 it hit a near 15 year low of 65 percent and the market entered a massive decade long bull market.
In 2021 after years of printing money and zero rates after COVID it hit an all time high of 200 percent of GDP, in 2022 the S and P 500 fell over 25 percent afterwards.
Now we again are seeing market cap to GDP hitting near 200 percent or nose bleed levels.
It maybe time to start to get cautious on markets.
