After the Dot-Com Bubble crash in 2000, Buffett noted that comparing the market capitalization of stocks to Gross Domestic Product (GDP) is the best indicator of whether equities are overvalued or undervalued at current prices.
The indicator, dubbed as the ‘Warren Buffett Indicator’ is calculated by looking at the ratio of the total market index compared to the GDP of the U.S. The total market index is tracked by the Wilshire 5000, which is a market-cap-weighted index tracking all U.S. publicly traded companies, comprised of more than 3,000 companies.
Currently, the Wilshire 5000 to GDP ratio sits around 195% according to Barchart, higher than the ratio preceding the dot-com bubble crash as well as the Great Financial Crisis in 2007-2008. In 2000, when internet stocks like Pets.com reached historically speculative levels, the Buffett indicator was around 140%. In 2007, ahead of the subprime mortgage crisis that wreaked havoc on the economy for years, the ratio was around 110%.
2000 and 2007 we papered over a great depression with the money supply and then loans to individuals who ate an entire great depression. The institutions skated.
This time the economy is too good. This is a windup to a bull market for years to come. Will the market drop? Possibly into 1H25. Does it matter? The opposite I am ultra bullish longer term. The seasonality of the market is not very important.
I was born worried. I am a perpetual worrier. Right now I think stock prices are driven by a bunch of computers doing technical analysis instead of anything that has to do with business potential. That is just not my investing style–although I admit that I have a life-long practice of selling way too early.
Anyhow, I’m too old for speculation, so I’m trying to be careful.
No! Not worried as the stock market is not connected to/related to/in the same world as the economy or GDP. Not sure exactly when the disconnect happened.
In m view the stock market has only been tangentially linked to the economy since, well, forever. 1928 comes to mind as one particularly egregious example. But 1999 will do, or 2008, 1873, 1865, or, well lots of others.
If a stock really represents the sum of all future earnings why do they fall so far and so fast during a temporary recession? Like IBM will never be the same after the Nifty Fifty collapses?
For me, it’s just a legal casino - albeit with some attachments to economic success of companies rather than balls being batted or picked out of a jar. The only true economic benefit is at an IPO (or subsequent events) where money changes hands in return for something else of value: ownership. All the rest is just gamblers at the table, (with the possible exception of making mediocre CEO’s fabulously rich via options.)
I’ve become convinced it’s all a house of cards, that nobody really knows anything, and the best we can do is protect what we’ve got as best we can … and occasionally put a little side bet on Red 13. Or Nvdia. Or the Red Sox. Just for fun.
Because the response to the temporary recession can have future consequences. For example, tightening into a recession could cause a depression with 10+ years of reduced growth. Another example could be loosening too much in a pandemic could exacerbate supply chain issues and result in longer term supply chain issues.
The current stock price represents the average opinion of all people interested in that stock. And if the temporary recession causes a lowering of the expected value (let’s say there’s a 25% chance of government/etc doing the wrong thing, and a 25% chance of doing the right thing, and a 50% chance of just muddling along), then you need to account for all those probabilities in your estimation of the stock price (aka what you are willing to pay for it). As time goes by, if it appears that the right things are being done, then the stock price will naturally recover as the probability of screwing things up goes down.
Stocks go up and down, but the money you lose to fees, commissions, trading costs and taxes is gone forever.
You’ll notice that Warren Buffett may be curtailing current purchases, but he’s not selling 50% of BRK’s $400 Billion stock portfolio and going to cash in an effort to time the market.
As Charlie Munger said, “If you’re a stock investor, you’re going to see two or three 50% plus stock market declines in your lifetime. If you can’t hold through that, you probably shouldn’t be investing in the stock market.”
Well, because there is really no way to predict with certainty ‘the sum of all future earnings’. Consequently, an investors view of this number will change quickly and easily and encourage/discourage investment. I think there was a real connection between the market and the economy. The point at which that changed is up for discussion. I would lean towards the post-war period and the Mad Men period of advertising and the development of financial playthings to manipulate. When did Private Equity get it’s start?
And when you decide you don’t want ownership in perpetuity what do you do? You sell your part ownership to someone else. That is where a market comes into play. A liquid market.
And yet that is (supposedly) what you are buying when you purchase stock.
But it’s a wild overreaction at the approach of a recession, unless that recession is deep and long lived. Most last 18 months, often less, occasionally more, during which time the company earnings do not go to zero, often they are affected in only a minor way. (Cost cutting, layoffs, vendor squeeze, etc. helps prop it up.)
So when stock prices drop by 30%, 40% it’s ridiculous - assuming that “savvy” investors are buying the lifelong earnings of a company, when those earnings are affected to only a tiny percentage.
That’s why it’s like gambling, except easier. The market gets mania. Horses at the track, the ball falling into a red slot, the basketball going through the hoop, the scratch off ticket winning $1,000,000 are far less predictable, yet people throw billions at them. The reaction to minor events (in the scheme of things) reminds me of drunken players at the craps table. “Lifetime earnings”. What a joke.
I’m not saying the stock market is bad gambling, but gambling it is.
That is not true in any sense of the word gambling no matter how frequently the word is used in this context.
Gambling is classical odds.
Business is financial risks, business risks, and economic risks.
There are enormous differences. Businesses ideally are the leveraging of labor and resources to meet the market more accurately for a profit and potential growth in operations.
Gambling is for an %jit to lose his money. The fool took away my word $jit.
If you have size, you can move the market to your benefit. That is what the manager of one of the funds at Invesco was doing some years ago: frontrunning his moves with the fund, with his personal account.
