What Is The Buffett Indicator?

jayc
2021-09-08

The Buffett Indicator is the ratio of total US stock market valuation to GDP. Named after Warren Buffett, who called the ratio "the best single measure of where valuations stand at any given moment". (Buffett has since walked back those comments, hesitating to endorse any single measure as either comprehensive or consistent over time, but this ratio remains credited to his name). To calculate the ratio, we need to get data for both metrics: Total Market Value and GDP.

Total Market Value

The most common measurement of the aggregate value of the US stock market is the Wilshire 5000. This is available directly from Wilshire (links to all data sources below), with monthly data starting in 1971, and daily measures beginning in 1980. The Wilshire index was created such that a 1-point increase in the index corresponds to a $1 billion increase in US market cap. Per Wilshire, that 1:1 ratio has drifted, and as of Dec 2013 a 1-point increase in the index corresponded to a $1.15 billion dollar increase. We adjust the data back to inception (and projected going forward) on a straight-line basis to compensate for this drift. For example, the Sep 2020 Wilshire Index of 35,807 corresponds to a total real market cap value of $42.27T USD. 

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  • xifu
    ·2021-09-08
    it's a good indicator but we should also look at other indicators to paint a clearer picture.
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    • jayc: 
      Agree, we certainly cannot rely solely on a single indicator to have a good gauge of the market.
      2021-09-08
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  • JL28168
    ·2021-09-08
    great sharing
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    • jayc: 
      [握手]
      2021-09-08
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  • jayc
    ·2021-09-08
    The current market-to-GDP ratio is 90% above the historical average, and considered Strongly Overvalued.
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  • coldeye
    ·2021-09-08
    Good sharing make investor aware of what happening and understand.
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