The total market capitalization of U.S. companies exceeds the value of U.S. GDP, and is not usually good news for the market. For the legendary investor Warren Buffett it is a serious warning of a bubble in the stock market. In 2001 and 2008, it happened just before the dotcoms and the subprime crisis burst. Can this scenario benefit Bitcoin?
For months now, there has been a warning about a possible bubble in the stock market, especially in the US, where, despite the pandemic, the main indexes are trading at historical highs.
Although many technology companies have benefited from the boom in recent months, as a result of the global confinement, other highly overvalued sectors are clearly seen.
Alert on possible bubble on Wall Street
Warren Buffett indicator points to possible bubble
In late 2001, investment genius Warren Buffett wrote down one of his great lessons for traders when analyzing the dotcom collapse, according to theEconomista.es.
In practice, it is a simple formula to anticipate the bubbles that are created in the market. Since then it has become known as the Buffett indicator, the division of total US stock market capitalization into US GDP.
For the famous investor, it would have been an infallible signal to see one of the biggest stock market debacles in recent history coming, „probably the best individual measure of where valuations are at any given time.
The indicator worked in the two previous crises, in 2000 and 2008, the capitalization of American stocks exceeded 100% of GDP, which translates into an overvalued market and an increased risk of seeing the market plummet.
Buffett’s interpretation points to a mismatch between investor expectations and the country’s economic growth. The coronavirus crisis has caused the biggest economic collapse in the history of the United States. The unprecedented drop in GDP has triggered market capitalization with respect to the growth of the economy.
Buffett is not alone in not losing sight of this metric. Investors usually use the Wilshire 5000 index, which encompasses all companies listed in the United States, although it does not include companies listed below one dollar, as a reference for the total capitalization of the American market.
Historically, the average of the Buffett indicator has been around 65% of GDP. When it is in the range of 70% to 80%, the famous investor considers it a good entry point into the market, with listed companies undervalued.