The Buffett Indicator – a market valuation measure – is signaling potential danger as it surpasses levels witnessed during the Dot-Com Bubble and the Great Financial Crisis.
The total market index, tracked by the Wilshire 5000, and the U.S. GDP are used to calculate this ratio. The Wilshire 5000, a market-cap-weighted index, tracks all U.S. publicly traded companies, which includes more than 3,000 firms. The higher the ratio, the more overvalued the market is deemed to be.
Data from Longtermtrends reveals that the current Wilshire 5000-to-GDP ratio stands at approximately 208%, surpassing levels seen prior to both the Dot-Com Bubble and the Great Financial Crisis.
For context, during the height of the Internet stock frenzy in 2000, the Buffett Indicator reached 140%. In 2007, just before the subprime mortgage crisis disrupted global markets, the ratio was around 110%.
In a Fortune article from 2001, Buffett characterized this level as “playing with fire” alluding to the dotcom bubble.
“Nearly two years ago the ratio rose to an unprecedented level,” Buffett wrote.
“That should have been a very strong warning signal.”
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