US Stock Market Capitalization At 2X GDP: How Ominous Is It?

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A commonly used yardstick for assessing the valuation of the stock market is the ratio of the market’s capitalization to GDP. This ratio has been dubbed the “Buffett indicator,” because Warren Buffett stated in a 2001 Fortune interview that “it is probably the best single indicator of where valuations stand at any moment.” Interest in this metric has increased recently as it has reached an all-time high.

The logic for using it is that the over long periods the valuation of the stock market should mirror the performance of the economy. However, there can be significant deviations in the interim owing to cyclical forces.

When Buffett analyzed the U.S. stock market boom in the late 1990s, the ratio of the Wilshire 5000 index to GDP reached a then record high of 136% at the end of 1999. It subsequently plummeted after the tech bubble burst in the early 2000s and eventually sank to a low of 57% during…

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