If you are concerned about the rapid growth of the stock market, you aren’t the only one seeing warning signs. The “Oracle of Omaha,” Mr. Warren Buffett, has seen one of his most trusted warning signs in today’s market, according to Time Money.
Forget trying to run complicated calculations or read the stock market’s tea leaves. Warren Buffett says the “single best” way to tell if stocks are too expensive is to look at two simple numbers: the total value of all equities in the market and the total size of the economy. When the value of all stocks is 80% or less than the size of the economy, “buying stocks is likely to work very well for you,” Buffett wrote in an article for Fortune back in 2001. But when total equity value exceeds the size of the economy and then some, it’s a sign that investors are getting too giddy — and greedy.
If that is true than the status quo does not look all that promising. “The value of all the equities in the Wilshire 5000 Total Market Full Cap Index (a proxy for the entire domestic market) stands at $26 trillion. That’s 135% of U.S. gross domestic product (GDP), according to figures tracked on a quarterly basis by the Federal Reserve Bank of St. Louis.” A %55 premium over Buffett’s suggested value is a serious overvaluation if you follow his logic.
Investors should take time and read the full article at time.com. Even if you do not share Buffett’s view, it gives tremendous insight into how one of the world’s most successful investors determines economic trends. That in itself is worth the read.
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