The Buffet Indicator
The Buffett Indicator is the ratio of total the United States stock market valuation to GDP. It is said to be the best predictor of market corrections or crashes.
As of May 6, 2021:
- Aggregate US Market Value: $51.8T
- Current Quarter Annualized GDP: $22.6T
- Buffett Indicator: $51.8T ÷ $22.6T = 229%
Historically, when the stock market went above GDP by 50-100% it crashed, going below GDP. 2021 is the year in the last 100 years when the ratio was over 2x the largest stock market in history.
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The impact of tech on the Buffet indicator
In 2021, Elon Musk asked Cathie Wood, the famous tech-focused investor from Ark investments, what is her explanation for the high Buffet indicator (a ratio of US stock market/GDP). Cathie suggests a few reasons:
- while the indicator maintained its pattern over the last 100 years,
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