Observations From The Buffett Indicator

The Buffett Indicator compares total equity capitalization versus GDP. A key observation from the chart below is that stocks are currently strongly overvalued, exceeding the previous peak seen during the internet bubble era.

A second is that the current level of over-valuation is predicted to occur only 2% of the time, yet it has occurred twice in the past 20years! Extreme events occur in markets more often than probability predicts because of human psychology, which is prone to creating bubbles and crashes. For example, probability would not have predicted that we would see 3 major stock market crashes between 1987 to 2008.

The Buffet Indicator is yet one more of a wide range of tools that suggest an extreme of sentiment and valuation.

The result, in our opinion, is a very high-risk market environment. We discuss our risk calculations at length in the recently published February issue. We also update our views on global markets, our current investment positions, and our methods to optimize risk/reward.

If you found this post of interest, you’ll find the Global Investment Letter of value. To view free sample issues and to receive our weekly investment comment please visit: https://www.globalinvestmentletter.com/sample-issue/