The Buffett Indicator, also known as the Buffett Indicator in English, is a financial indicator that measures the total value of a country's publicly traded stocks as a percentage of the country's gross domestic product. It is calculated as a ratio calculated by dividing a country's total stock market value by its GDP. Investing guru Warren Buffett believed this metric to be "probably the best single measure of valuation levels at any given moment" and popularized its use, so it was later named after him. The direct effect of using the Buffett indicator is to assess whether the stock market is overvalued: When the Buffett indicator ratio is between 50% and 75%, the stock market is considered undervalued; When the ratio is between 75% and 90%, the stock market value is considered fair; When the ratio is between 90% and 115%, it is considered moderately overvalued, and when it exceeds 115%, it is considered overvalued. Additionally, comparing the Buffett Indicator to its historical value allows you to evaluate the country's economic development trends over a specific period of time. For the U.S. market, analysts often use The Wilshire 5000 Total Market Index as the total value of all publicly traded stocks in the U.S. because it is an index that represents the value of all stocks in the U.S. market. Gross Domestic Product (GDP) is calculated and published quarterly by the U.S. government's Bureau of Economic Analysis. For investment analysts, the stock market value has certain predictability of future trends, while the GDP value is a measure of previous economic activity. The division of the two is generally an analysis of current economic activity. What is the significance of the Buffett indicator? The numerical significance of the Buffett Index is to evaluate the proportion of the total value of listed companies compared to the GDP. When the Buffett Index ratio is between 50% and 75%, the stock market value is considered to be undervalued. When the ratio is between 75% and 90%, the stock market value is considered to be fair. When the ratio is between 90% and 115%, it is considered moderately overvalued. When the ratio exceeds 115%, it is considered overvalued. On the other hand, because the United States is a financial power and stock investment is the most important financial investment product, comparing the total market value of the stock market with the GDP value can provide a more holistic assessment of the economic environment. For example, between 1972 and 1975, the Buffett Index rose to its highest point of 85% in 1972, and then began to gradually decline, which corresponded to the first oil shock and stock market crash that occurred at that time. Between 1999 and 2002, the Buffett Index rose to 143% in 1999 and then began to decline until 2002, which echoed the economic recession caused by the dot-com bubble that occurred at that time. Between 2007 and 2008, the Buffett Index recovered from the previous recession to 103% in 2007, but began to decline again with the outbreak of the global financial crisis in 2008. In 2009, the United States began its quantitative easing policy. Since then, the Buffett Index has continued to soar, and its assessment of the economy has also begun to deviate. It exceeded 100% again in 2013, and further increased during COVID-19. By the end of 2020, the Buffett Index had reached 186%, and in the first quarter of 2022, the value was close to 192%. Since the beginning of the quantitative easing policy, Buffett's value has continued to soar. First of all, it shows that the total value of all listed companies in the United States has exceeded the total economic output. On the other hand, it can also reflect that investors generally expect that economic growth will remain very strong in the future. However, as the Buffett Index continued to surge after the quantitative easing policy began, investors began to question whether the financial indicator still had its reasonable evaluation value. First of all, as more and more private companies begin to conduct public offerings, the ratio of listed companies to private companies in the U.S. economic environment has increased significantly, which will lead to the continuous rise of the Buffett Index. However, in terms of the impact on the overall U.S. economy, there is not much essential difference between a company's public offering or privatization.
Secondly, as financial investment portfolios continue to be diversified, investors can invest in more types of objects, such as bonds, real estate, or physical commodities, so calculating the Buffett Index using only stock investments will produce a bias in the assessment of the overall economy. Finally, the Buffett Index does not consider international economic activities. The stock market may reflect this, but GDP does not. For example, Amazon's sales in China will not be calculated into the GDP of the United States, but will be reflected in the stock price of Amazon in the United States. Therefore, this type of operating model will directly increase the value of the Buffett Index, and as international trade continues to expand, this situation will continue to intensify. How to use the Buffett indicator to evaluate the current U.S. stock market? According to the Wilshire 5000 Total Market Index provided by Yahoo Finance, the value for the first quarter of 2022 was $46.7 trillion. The GDP value of the United States in the first quarter of 2022 is $24.38 trillion [BEA] Therefore, the current Buffett indicator in the United States is: Market capitalization as a share of GDP = Stock market capitalization / Gross domestic product ×100% Market Capitalization to GDP = SMC / GDP ×100% = $46.7T / $24.38T ×100% = 191.55% This calculation shows that the entire U.S. stock market is currently worth 191.55% of GDP, which means it is overvalued. However, considering the various economic policies of the United States after COVID-19 and the continuous expansion of international trade, the accuracy of this value is still open to question.