Buffett Indicator and Its Use!

According to the Buffett Indicator, the US Stock Market is Significantly Overvalued. The recent Market Cap to GDP Ratio is 189.2%. The Total Market Index is at $56,727 billion, which is about 189.2% of the last reported GDP. For Malaysia it is 98% (on current prices), or modestly unvervalued.

Ratio = Total Market Cap / GDP	Valuation
Ratio ≤ 85%	Significantly Undervalued
85% < Ratio ≤ 110%	Modestly Undervalued
110% < Ratio ≤ 134%	Fair Valued
134% < Ratio ≤ 159%	Modestly Overvalued
Ratio > 159%	Significantly Overvalued

Meanwhile, based on the historical ratio of newly introduced total market cap over GDP plus Total Asset of Federal Reserve Banks, the Stock Market is Significantly Overvalued. Based on recent data, the Market Cap to GDP Ratio with Fed Assets is 154.6%.

The recent Total Market Index with Fed Assets is about 154.6% of the summation of the last reported GDP and Total Assets of Fed.

Ratio = Total Market Cap / (GDP + Total Assets of Fed)	Valuation
Ratio ≤ 70%	Significantly Undervalued
70% < Ratio ≤ 90%	Modestly Undervalued
90% < Ratio ≤ 110%	Fair Valued
110% < Ratio ≤ 131%	Modestly Overvalued
Ratio > 131%	Significantly Overvalued

The US nominal GDP is currently at $29.98 trillion of which total assets held by all Federal Reserve Banks is $6.709 trillion.

The Buffett Indicator is a crucial tool for investors, analysts, and policymakers, offering valuable insights into market valuation:

1. Valuation Benchmark: The Buffett Indicator helps gauge whether the stock market is overvalued or undervalued compared to the overall economy. A high ratio might indicate that the market is overpriced relative to the economic output, while a low ratio could suggest undervaluation.
2. Investment Guidance: Investors use the Buffett Indicator to make informed decisions about their investments. A high ratio might signal caution, suggesting that the market may be due for a correction. Conversely, a low ratio could present buying opportunities, indicating potential undervaluation.
3. Economic Indicator: The ratio also provides a broad measure of economic health. Significant deviations between market capitalization and GDP can reflect shifts in investor sentiment or economic conditions, offering a macroeconomic perspective.
4. Historical Comparison: By comparing the current Buffett Indicator ratio with historical data, investors can identify long-term market trends and assess whether current valuations are in line with historical norms.

Reference:

Buffett Indicator, https://buffettindicator.net/