One of the many gauges for whether a bubble exists – and, by extension, whether there is a high danger of recession – is the measurement of the value of the U.S. stock market compared to the nation’s gross domestic product (GDP).
The Warren Buffett indicator, also known as market cap-to-GDP, measures the total value of all publicly traded stocks relative to the GDP. Since June, this ratio has been steadily climbing toward 200%, indicating a significant overvaluation in the stock market.
By July 24, 2024, the indicator first coined after a 2001 Buffett interview had reached a new all-time high (ATH) ratio at 197.5%, seemingly confirming the warnings of many experts and analysts who have been claiming that a massive bubble has formed.
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For comparison, the current Buffett indicator highs are well above the peaks seen near the times of previous crises, including the Dot-com bubble, the Great Recession, and ahead of the 2022 bear market.
How overvalued have U.S. stocks become?
For a long time, a reading of approximately 70% has been considered normal for the Buffett indicator, though in the 21st century, the needle has moved toward 100%, being seen as stable.
Though the July levels are significantly higher than either of the two figures, they do not guarantee a collapse in incoming as the indicator has, in actuality, only correctly predicted a recession approximately 50% of the time overall and about 56% in the last two decades.
Nonetheless, it remains an important gauge to watch, particularly in the current climate, which features numerous warnings of systemic instability.
Is there cause for concern?
In recent months, the strength of regional banks has been repeatedly questioned, and a nonpublic report by a key regulator has also questioned the risk-handling capabilities of major banks.
Simultaneously, the International Monetary Fund (IMF) has been increasingly stepping in and cautioning that the United States’ growth is unsustainable and that it has to address its deficit.
Elsewhere, various experts have been warning of a major forthcoming inflation crisis, a massive bubble formed around artificial intelligence (AI), a deep plunge for some of the best-performing stocks of the year, and of a coming recession.
Finally, on July 19, the world was reminded of the fragility of one the most important hallmarks of the 21st century whose importance encompasses but also goes far beyond finance – the global digital infrastructure.
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