Charlie, in a future video can you do a chart that shows the stock market valuation as a percentage of total GDP? Curious how that looks historically. Thanks for the great content
The so-called Buffett indicator is a fatally flawed metric. 40% of revenue is from overseas which is obviously not in US GDP. Furthermore GDP is a measure of income market cap is a measure of net worth. According to Bank of America for each 1% change in GDP growth corporate profit growth changes 4%. Meaning that market cap to GDP should be rising over time if US corporations have natural leverage to the economy. And since Giant companies get money from outside of the US which is never included in US GDP you would expect market cap to GDP to always go up over time. National net worth over GDP also rises overtime. Think of it this way. My personal net worth divided by my income will go up over time. Anyone who claims this is a sign of a dangerous bubble doesn't understand how the economy is working. The so-called Buffett indicator is something he mentioned once and some in the financial media have attempted to portray it as his favorite metric there is no academic research backing up market cap to GDP as a superior valuation metric.
My apologies I overstated things a bit. Here is a perplexity response to the question of the buffet indicator. There is some evidence that it is like most valuation metrics somewhat predictive of future returns however even Buffett walked back his praise for this indicator.
The media keeps talking about the Buffett indicator stock market to GDP. can you please fact check this? how often has Buffett ever mentioned US stock market divided by GDP? is there any academic research supporting this valuation metric? it seems the fact that 40% of foreign profits being derived from overseas means that this would be a fatally flawed metric from the get-go. as with the fact that corporate profits grow faster than GDP and have done so for centuries. The Buffett Indicator, which is the ratio of the total U.S. stock market value to GDP, has been a topic of discussion in financial media and among investors. Here’s a detailed examination of its origins, Warren Buffett's actual stance on it, academic research supporting it, and criticisms of its validity. ## Warren Buffett's Mention of the Indicator Warren Buffett first mentioned the stock market to GDP ratio in a 2001 interview with *Fortune* magazine, where he referred to it as "probably the best single measure of where valuations stand at any given moment"[2][4]. However, Buffett has since tempered his endorsement, cautioning against relying on any single metric to gauge market valuations[2]. ## Academic Research Supporting the Buffett Indicator Several studies have explored the predictive power of the Buffett Indicator: - **International Evidence**: Research by Laurens Swinkels and Thomas Umlauft examined the indicator across 14 developed market countries from 1973 to 2019. They found that the market value of equity-to-GDP ratio has predictive characteristics for long-term returns, although it varies significantly across countries due to different financial structures and regulatory environments[4]. - **China's Stock Market**: A study investigated the applicability of the Buffett Indicator in China, finding that composite models including the Buffett Indicator performed better in predicting the Shanghai Index than other models[3]. ## Criticisms and Limitations The Buffett Indicator has several limitations that critics often highlight: 1. **Foreign Profits**: A significant portion of U.S. corporate profits comes from overseas operations, which the GDP measure does not account for. This discrepancy can distort the indicator, making the stock market appear more overvalued than it might be if only domestic profits were considered[1][6]. 2. **Corporate Profit Growth**: Historically, corporate profits have grown faster than GDP, which can make the stock market appear overvalued when using the Buffett Indicator. This is because the stock market capitalization reflects future profit expectations, which may grow at a different rate than GDP[5]. 3. **Interest Rates and Economic Conditions**: The indicator does not account for changes in interest rates or other economic conditions that can affect stock valuations. High interest rates, for example, can depress stock prices independently of GDP growth[1]. 4. **Market Structure Changes**: The structure of the stock market and the economy can change over time, affecting the relationship between market capitalization and GDP. For instance, the rise of technology companies with high market caps but relatively lower contributions to GDP can skew the indicator[6]. ## Conclusion While the Buffett Indicator can provide a broad sense of market valuation relative to the economy, it is not without its flaws. The influence of foreign profits, the faster growth rate of corporate profits compared to GDP, and other economic factors can all impact its accuracy. Therefore, it should be used in conjunction with other metrics and analyses rather than as a standalone measure. Citations: [1] Buffett Indicator Valuation Model www.currentmarketvaluation.com/models/buffett-indicator.php [2] What Warren Buffett said about the so-called 'Buffett Indicator' www.tker.co/p/warren-buffett-on-the-buffett-indicator [3] [PDF] How Does the Buffett Indicator Work in China? dc.etsu.edu/cgi/viewcontent.cgi?article=1687&context=honors [4] The “Buffett Indicator” Predicts Historically Low Long-Term Equity ... www.advisorperspectives.com/articles/2022/05/23/the-buffett-indicator-predicts-historically-low-long-term-equity-returns [5] The Buffett Indicator Revisited: Market Cap-to-GDP and Valuations blogs.cfainstitute.org/investor/2021/01/29/the-buffett-indicator-revisited-market-cap-to-gdp-and-valuations/ [6] Don't Fear the Buffett Indicator - EdgeRock Wealth Management edgerockwealth.com/dont-fear-the-buffett-indicator/
Since 1990 the single best valuation metric has been free cash flow yield. FCF/EV. Based on this metric the US stock market appears 7.5% historically overvalued using a 10-year rolling average. The PEG ratio of the S&P is 1.26 compared to the 10-year average of 1.77 and the 20-year average of 2.44.
Digging into the components for PPI - doesn't appear to be a signal for CPI just yet but that could change. Same for import prices which are trending up again.
@@charlie_bilello Thank you! I suppose it could reduce profit margins rather than cost increases being passed on to consumers, assuming the PPI trend even continues.
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As always Great Info. and reason to be cautious going forward from the historic perspective. Thanks!
Thanks Vivek!
Thanks for the very important data, interesting to watch what comes next for small caps.
@@gabifeigenbaum5307 they are ripping!!!!
Thanks for watching, what a crazy past week in the markets!
Charlie, in a future video can you do a chart that shows the stock market valuation as a percentage of total GDP? Curious how that looks historically. Thanks for the great content
The so-called Buffett indicator is a fatally flawed metric. 40% of revenue is from overseas which is obviously not in US GDP. Furthermore GDP is a measure of income market cap is a measure of net worth. According to Bank of America for each 1% change in GDP growth corporate profit growth changes 4%. Meaning that market cap to GDP should be rising over time if US corporations have natural leverage to the economy. And since Giant companies get money from outside of the US which is never included in US GDP you would expect market cap to GDP to always go up over time. National net worth over GDP also rises overtime. Think of it this way. My personal net worth divided by my income will go up over time. Anyone who claims this is a sign of a dangerous bubble doesn't understand how the economy is working. The so-called Buffett indicator is something he mentioned once and some in the financial media have attempted to portray it as his favorite metric there is no academic research backing up market cap to GDP as a superior valuation metric.
My apologies I overstated things a bit. Here is a perplexity response to the question of the buffet indicator. There is some evidence that it is like most valuation metrics somewhat predictive of future returns however even Buffett walked back his praise for this indicator.
The media keeps talking about the Buffett indicator stock market to GDP. can you please fact check this? how often has Buffett ever mentioned US stock market divided by GDP? is there any academic research supporting this valuation metric? it seems the fact that 40% of foreign profits being derived from overseas means that this would be a fatally flawed metric from the get-go. as with the fact that corporate profits grow faster than GDP and have done so for centuries.
The Buffett Indicator, which is the ratio of the total U.S. stock market value to GDP, has been a topic of discussion in financial media and among investors. Here’s a detailed examination of its origins, Warren Buffett's actual stance on it, academic research supporting it, and criticisms of its validity.
## Warren Buffett's Mention of the Indicator
Warren Buffett first mentioned the stock market to GDP ratio in a 2001 interview with *Fortune* magazine, where he referred to it as "probably the best single measure of where valuations stand at any given moment"[2][4]. However, Buffett has since tempered his endorsement, cautioning against relying on any single metric to gauge market valuations[2].
## Academic Research Supporting the Buffett Indicator
Several studies have explored the predictive power of the Buffett Indicator:
- **International Evidence**: Research by Laurens Swinkels and Thomas Umlauft examined the indicator across 14 developed market countries from 1973 to 2019. They found that the market value of equity-to-GDP ratio has predictive characteristics for long-term returns, although it varies significantly across countries due to different financial structures and regulatory environments[4].
- **China's Stock Market**: A study investigated the applicability of the Buffett Indicator in China, finding that composite models including the Buffett Indicator performed better in predicting the Shanghai Index than other models[3].
## Criticisms and Limitations
The Buffett Indicator has several limitations that critics often highlight:
1. **Foreign Profits**: A significant portion of U.S. corporate profits comes from overseas operations, which the GDP measure does not account for. This discrepancy can distort the indicator, making the stock market appear more overvalued than it might be if only domestic profits were considered[1][6].
2. **Corporate Profit Growth**: Historically, corporate profits have grown faster than GDP, which can make the stock market appear overvalued when using the Buffett Indicator. This is because the stock market capitalization reflects future profit expectations, which may grow at a different rate than GDP[5].
3. **Interest Rates and Economic Conditions**: The indicator does not account for changes in interest rates or other economic conditions that can affect stock valuations. High interest rates, for example, can depress stock prices independently of GDP growth[1].
4. **Market Structure Changes**: The structure of the stock market and the economy can change over time, affecting the relationship between market capitalization and GDP. For instance, the rise of technology companies with high market caps but relatively lower contributions to GDP can skew the indicator[6].
## Conclusion
While the Buffett Indicator can provide a broad sense of market valuation relative to the economy, it is not without its flaws. The influence of foreign profits, the faster growth rate of corporate profits compared to GDP, and other economic factors can all impact its accuracy. Therefore, it should be used in conjunction with other metrics and analyses rather than as a standalone measure.
Citations:
[1] Buffett Indicator Valuation Model www.currentmarketvaluation.com/models/buffett-indicator.php
[2] What Warren Buffett said about the so-called 'Buffett Indicator' www.tker.co/p/warren-buffett-on-the-buffett-indicator
[3] [PDF] How Does the Buffett Indicator Work in China? dc.etsu.edu/cgi/viewcontent.cgi?article=1687&context=honors
[4] The “Buffett Indicator” Predicts Historically Low Long-Term Equity ... www.advisorperspectives.com/articles/2022/05/23/the-buffett-indicator-predicts-historically-low-long-term-equity-returns
[5] The Buffett Indicator Revisited: Market Cap-to-GDP and Valuations blogs.cfainstitute.org/investor/2021/01/29/the-buffett-indicator-revisited-market-cap-to-gdp-and-valuations/
[6] Don't Fear the Buffett Indicator - EdgeRock Wealth Management edgerockwealth.com/dont-fear-the-buffett-indicator/
Since 1990 the single best valuation metric has been free cash flow yield. FCF/EV. Based on this metric the US stock market appears 7.5% historically overvalued using a 10-year rolling average. The PEG ratio of the S&P is 1.26 compared to the 10-year average of 1.77 and the 20-year average of 2.44.
I love Costco. It's where we go on date night!
Haaa, good value there.
Thank You Charlie Bilello!
Thanks for watching Richard!
this is the kinda event that REALLY justifies owning SPY and likes, the whole market
thx charlie!
Great video as usual. I just don't think there will be 6 rate cuts this year. More like 2.
Thanks for watching. Market is pricing in 2-3 rate cuts this year and another 4 in 2025.
Thanks, so do we just ignore the PPI report and is it not an indication that CPI will start rising again?
Digging into the components for PPI - doesn't appear to be a signal for CPI just yet but that could change. Same for import prices which are trending up again.
@@charlie_bilello Thank you! I suppose it could reduce profit margins rather than cost increases being passed on to consumers, assuming the PPI trend even continues.
Kirkland Ai
Shit. Does this mean yololing my life savings into January 2025 SPY calls was a bad idea?