The Buffett Indicator At All-Time Highs: Is This Cause For Concern?

The Ratio

According to Warren Buffett, “if the ratio approaches 200%…you are playing with fire.”

The Buffett Indicator since 1950

And with the current U.S. ratio sitting at 228%—about 88% higher than historical averages, it certainly looks like things are heating up.

Will History Repeat Itself?

As the popular investing expression goes, the trend is your friend. And historically, the Buffett Indicator has predicted several of America’s most devastating economic downturns.

Here’s a look at some historical moments in the U.S. stock market, and where the Buffett Indicator was valued at the time:

Date Event Buffett Indicator Value (+/- Trendline)
October 1987 Black Monday Fairly Valued -13%
March 2000 Dotcom Bubble Strongly Overvalued +71%
December 2007 Pre-Financial Crisis Fairly Valued +18%
March 2009 Financial Crisis Bottom Undervalued -46%
February 2020 COVID-19 Overvalued +49%
February 2021 Today Strongly Overvalued +88%

As the table shows, the ratio spiked during the Dotcom Bubble and was relatively high in the months leading up to the 2008 financial crisis. But does that mean we should take the ratio’s current spike as a warning for a market crash in the near future? According to some experts, we might not need to sound the alarms just yet.

Why are some investors so confident in the current market? One main factor is low-interest rates, which are expected to stay low for the foreseeable future.

When interest rates are low, borrowing money becomes cheaper, and future real earnings are theoretically worth more, which can have a positive impact on the stock market. And low-interest rates mean smaller returns for low-risk assets like bonds, which lowers investor demand and ultimately boosts stock prices further. Meaning that, as long as interest rates are at record lows, the Buffett Indicator will likely stay high.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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