The Warren Buffett Stock Market Indicator measures if the stock market is too high or low by simply comparing its total dollar value to the total dollar value of the U.S. economy (GDP). Currently, this indicator, which is Mr. Buffett’s favourite, is two standard deviations above average showing that the stock market is expensive relative to the economy.
https://www.currentmarketvaluation.com/models/buffett-indicator.php
Our take:
- While this broad-based indicator has never been a very good timing tool, it does indicate that stock valuations are far ahead of the economy. To normalize, either stocks will correct at some point or the U.S. economy will have to grow at a faster pace. It may take a while but the relationship between the stock market and the economy needs to be respected.
- Mr. Buffett is correct to note that the economy is cyclical and is the basis for markets. He is an excellent investor. The fact that he has recently been raising cash tells us that at some point there may be opportunities to invest at lower valuations.
We don’t know the future but, like Warren Buffett, we believe in being prepared and the value of disciplined investing. Our CommonWealth investment models are very tactical as they are designed to participate in market upside and also become defensive as conditions change.
If you would like to learn more about how our investment models can work for you please give us a call.
~ Your CommonWealthTeam ~
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