“Investors could spot the 2001 dot.com crash from a mile away,” legendary investor Warren Buffett once said. How? If only they had looked at the US stock market capitalization to GDP ratio, which had entered a dangerous zone then. It is now glowing red again not only in the US but also globally.
- The ratio of the US stock market capitalization to the country’s GDP exceeded 170% after the data for Q2 this year, which is the highest level in history
- The indicator has also entered a dangerous field at the global level
- This is Warren Buffett’s favorite market tip, as he says he can tell when investors start inflating the bubble
In a 2001 article for Fortune, Buffett described this index as “possibly the best measure of current market valuations at any given time.” What is going on?
Stock market capitalization vs national and global GDP – Warren Buffett’s favorite indicator signals the bubble
Known in investor circles as the “Buffett Index”, this measure is simply the total market capitalization of all US companies in relation to US GDP. In other words, it is the ratio of a country’s stock market capitalization to its total gross domestic product.
When it is below 50%, the market is very underweight; when it is in the range of 70 percent. up to 80 percent it is relatively stable. However, when it exceeds 100 percent. – it means that a bubble can form and everything can collapse at any moment like a house of cards.
After the US release of data for Q2 this year’s favorite indicator of Warren Buffett reached its historic peak at 170 percent. US GDP was then $ 19.4 trillion, while in the same period the US stock market was worth $ 33 trillion. Some read it as a clear sign of another collapse after the pandemic crash.
Now the matter becomes even more complicated because dangerous valuations concern the whole world. This was described by Die Welt economic journalist Holger Zschaepitz, who warns against the flashing sell signal. In fact, the index has just broken its 30-month peak and is at its highest point since 2018.
Over the past two decades, global markets have experienced large drops three times after the index passed 100%. – in 2000 (dot.com), 2008 (financial crisis) and again in 2018 (massive correction).
Buffett index – a critique
Of course, there are also many critical voices pointing to the disadvantages of the Buffett index. The first is that it compares current market capitalizations with GDP in the previous quarter. GDP does not take into account earnings abroad, and companies listed on US stock exchanges do not necessarily contribute to the growth of the US economy, many of the largest concerns have their branches outside the US.
What’s more, the last reading at 170 percent. in the US, it can be confusing and temporary, as the drastic decline in GDP is due to downtime and the economic shutdown as consumption patterns shift as many Americans stay at home.
Another coal for the furnace – tax cut
Meanwhile, Thursday’s session on Wall Street ended with declines of most indices. The S&P 500, which was just below its historic peak the day before, was also falling. Investors analyze the macro data and focus on passing the next stimulus package in Congress, in particular, another tax cut.
The number of people applying for unemployment benefits for the first time last week in the US was 963,000. Wall Street economists expected 1.1m new jobless claims, up from 1.191m previously, after revising from 1.186m.
The number of unemployed continuing to receive unemployment benefits was 15.486 million for the week that ended on August 1, against an expected 15,800 million and previously 16.090 million, revised from 16.107 million.
“It seems that the pace of layoffs is slowly starting to slow down, but still a huge number of people apply for unemployment benefits. One of the threats to the labor market and the economy is the lack of rush in negotiations on the next stimulus package,” said Ryan Sweet, director of policy. monetary policy in Moody’s Analytics.
US Treasury Secretary Steven Mnuchin indicated that the US Congress may pass a plan to help the economy amount to just over $ 1 trillion. and deal later with other additional incentives to support the economy.
“We can always come back later this year or in January (2021) and define another project,” Mnuchin told the Fox Business Network. “We don’t have to do everything at once,” he added.
US President Donald Trump on Wednesday described the Democrats’ proposals as “ridiculous”. The president of the US House of Representatives, Nancy Pelosi, announced in turn that Democrats are ready to resume negotiations when the US administration begins to take seriously talks on a plan to support the economy.
Pelosi said there was a “gulf” between both sides – Republican and Democrats – but that she hoped a compromise could be reached.
– The relapse of the coronavirus epidemic over the past few weeks has clearly slowed down the pace of economic development. Unfortunately, higher temperatures did not slow down the spread of the pandemic, argued Richmond Fed President Thomas Barkin. He added that a sudden cut in fiscal support to the economy would have many negative effects.
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