Warren Buffett warns to beware of critical stock market indicators which could be signaling huge losses ahead. Despite the fact that Warren Buffet’s favorite market indicator’s signaling huge danger ahead for investors the investor Oracle believes that stocks are still attractive.
But Warren Buffett warns beware also (which seems contradictory) because he thinks there could eventually be a stock market crash.
“Warren Buffett warns to beware of critical stock market indicators which could be signaling huge losses ahead”
So how can Warren Buffett warns beware of a stock market crash but at the same time still think stocks are still attractive without loss of credibility.
Warren Buffett reckons that investors can’t time when the market will crash. So instead of sitting on the sidelines – waiting and missing the upside – he recommends to just buy now. And when market price does crash eventually – which he acknowledges they will – you can use the correction as an opportunity to buy more at lower prices.
Moreover, Warren Buffett notes that stocks are more attractive to bonds. Indeed, it is this school of thinking among certain investors that supports Bill Miller’s 30% Stock Market Melt-Up.
Legendary investor Bill Miller 30% stock market melt-up is a contrarian view, bearing in mind that a growing number of investors believe the current bull market is akin to the decadence of the 1920s as portrayed in the Great Gatsby.
The crux of Bill Millers’ view, which Warren Buffett also shares, is that the first bubble to pop will be in bonds which will trigger a rotation of capital from bonds into equities. “I think we could have the kind of melt-up we had in 2013, where we had the market go up 30 percent” said Bill Miller.
“I think we could have the kind of melt-up we had in 2013, where we had the market go up 30 percent”
So Warren Buffett warns beware of a potential correction, nevertheless keep buying stocks because it is a ‘fool’s errand’ trying to time the market. Put another way instead of trying to time things accurately just measure the potential risk and reward.
“Warren Buffett warns beware of this critical stock market indicator”
So what is the indicator?
Market Cap-to-GDP metric is a long-term value indicator and it’s become back in vogue again thanks to Warren Buffet. The metric can be calculated by working out the total market value of all stocks outstanding and divide it by the nations GDP. When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.
Warren Buffett warns that his critical indicator of the ratio of a country’s stock market capitalization to the overall GDP of the country is sending up a sell signal.
If the stock market is below 50% of the GDP, it is too low. Between 75% and 90%, the market is about right. Above 115%, it is overvalued on a relative basis.
Warren Buffett warns that in late 2017 the market was over 130% of the GDP, since then stocks have become even more expensive.
So here is the takeaway, Warren Buffett warns, based on his critical indicator, that a correction could be imminent but don’t try and time it.