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Buffett Indicator


The Buffett Indicator (aka, Buffett Index, or Buffett Ratio) is the ratio of the total United States stock market to GDP.

Buffett Indicator =
Total US Stock Market Value Gross Domestic Product (GDP)

As of November 30, 2023 the ratio values are:

Total US Stock Market Value = $48.41T
Annualized GDP = $27.70T
Buffett Indicator = $48.41T $27.70T = 175%

This ratio fluctuates over time since the value of the stock market can be very volatile, but GDP tends to grow much more predictably. The current ratio of 175% is approximately 44.17% (or about 1.4 standard deviations) above the historical trend line, suggesting that the stock market is Overvalued relative to GDP.

Over the long run, stock market valuation reverts to its mean. A higher current valuation certainly correlates with lower long-term returns in the future. On the other hand, a lower current valuation level correlates with a higher long-term return. The total market valuation is measured by the ratio of total market cap (TMC) to GNP -- the equation representing Warren Buffett's "best single measure". This ratio since 1970 is shown in the second chart to the right. Gurufocus.com calculates and updates this ratio daily. As of 12/19/2023, this ratio is 172.7%.

We can see that, during the past five decades, the TMC/GNP ratio has varied within a very wide range. Based on current value and historical month-end values, the lowest point was about 32.7% in the previous deep recession in July 1982, while the highest point was about 199.5% in August 2021. The market went from Significantly undervalued in July 1982 to Significantly overvalued in August 2021.

Based on these historical valuations, we have divided market valuation into five zones:
Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 81% Significantly Undervalued
81% < Ratio ≤ 104% Modestly Undervalued
104% < Ratio ≤ 127% Fair Valued
127% < Ratio ≤ 150% Modestly Overvalued
Ratio > 150% Significantly Overvalued
Where are we today ( 2023-12-19)? Ratio = 172.7%, Significantly Overvalued

A quick refresher (Thanks to Greenbacked): GDP is “the total market value of goods and services produced within the borders of a country.” GNP is “is the total market value of goods and services produced by the residents of a country, even if they’re living abroad. So if a U.S. resident earns money from an investment overseas, that value would be included in GNP (but not GDP).” While the distinction between the two is important because American firms are increasing the amount of business they do internationally, the actual Difference between GNP and GDP is minimal as this chart from the St Louis Fed demonstrates:


GDP in Q4 2012 stood at $ 15,851.2 billion. GNP at Q3 2012 (the last data point available) stood at $ 16,054.2 billion. For our present purposes, one substitutes equally as well for the other.

Modified Version of Market Valuations

To understand the underlying logic of the Buffett Indicator -- the ratio of total market cap (TMC) to GNP, we must understand the economic cycle. The premise is that an economy is mainly driven by consumption and individuals must produce to consume. Corporations generate revenue and profits from the consumption and the profitability will ultimately be reflected in the stock market. Thus, GDP, which reflects the total value of production, is an underlying driving force for the corporate profits as well as the total market cap.

Going deeper, we introduce another factor that might also influence the total market cap, which is the Total Asset of Federal Reserve Bank. Just like any other financial statements, the Fed's balance sheet consists of assets and liabilities. The Federal Reserve, central bank of the United States, issues its weekly H.4.1 report on every Thursday, which provides a consolidated statement of the Condition of All Federal Reserve Banks, including total assets, total liabilities and total capital. The Fed's assets consist primarily of government securities and the loans it extends to its regional banks.

For decades, the Fed balance sheet has been used to predict changes in economic cycles. The expansion and contraction of the Fed's balance sheet can certainly influence the economy and the consumption of individuals and corporates, which consequently influence the stock market. Generally speaking, the Fed buys assets as a part of its monetary policy whenever it intends to increase the money supply and sells assets when it intends to decrease the money supply. If the Fed's goal is expansionary, it pours more money into the market and drifts down the interest rate. In this case, money can be borrowed at a lower rate, which drives individuals to consume and corporate to expand their business. On the other hand, an enormous drop in interest rates also promotes investment, as it makes a dollar of future profit much more valuable. Both results may lead to an inflow into the stock market, thus increasing the total market cap.

Based on the logic, we developed another indicator for market valuation by taking Fed’s total asset into account, TMC/(GDP + Total Assets of Fed) ratio. This indicator operates the same as Buffet Indicator, but gives an additional version. The ratio since 1970 is also shown in the second chart to the right, which gives the overall comparison to the Buffet Indicator. Gurufocus.com calculates and updates this ratio daily. As of 12/19/2023, this ratio is 134.7%.

We can see that, during the past five decades, the TMC/(GDP + Total Assets of Fed) ratio has varied within a very wide range. The lowest point was about 31.1% in the previous deep recession in July 1982, while the highest point was about 147.3% in August 2021.

Based on these modified historical valuations, we have divided market valuation into five zones:
Ratio = Total Market Cap / (GDP + Total Assets of Fed) Valuation
Ratio ≤ 67% Significantly Undervalued
67% < Ratio ≤ 87% Modestly Undervalued
87% < Ratio ≤ 106% Fair Valued
106% < Ratio ≤ 125% Modestly Overvalued
Ratio > 125% Significantly Overvalued
Where are we today ( 2023-12-19)? Ratio = 134.7%, Significantly Overvalued

Criticisms of The Buffett Indicator

No single metric is illustrative of the health or relative valuation entire market. Common criticisms of the Buffett Indicator are:

Interest Rates

The Buffett Indicator only considers the value of the stock market, but does not consider how stocks are valued relative to alternative investments, such as bonds.

When interest rates are high, bonds pay a high return to investors, which lowers demand (and prices) of stocks. Additionally, higher interest rates means it's more expensive for businesses to borrow money, making it harder to borrow cash as a way to finance growth. Any business that takes on debt will face relatively higher interest payments, and therefore fewer profits. Less corporate profits means lower corporate stock values. The corollary to this is also true. Low interest rates means bonds pay less to investors, which lowers demand for them, which raises stock prices in relation to bonds. Low interest rates make it easy for corporations to borrow cash to finance growth. Corporate interest payments will be low, making profits higher.

This is all to say that all else equal if interest rates are high, stock prices go down. If interest rates are low, stock prices go up.

Over the last 50 years the interest rate on 10 Year US Treasury bonds has averaged 5.87%. During the peak of the .com bubble when the Buffett Indicator was very high, the 10Y Treasury rate was a bit higher than average, around 6.5%, showing that low interest rates weren't juicing the stock market. Today the Buffett Indicator is still quite high relative to its historical trend line, but interest rates are still relatively low, currently at 4.37%.

This can be interpreted to mean that during the .com bubble, equity investors had other good options for their money - but they still piled recklessly into stocks. Whereas today, investing in bonds returns relatively little. Today's investors need to seek a return from somewhere, and low interest rates are forcing them to seek that return from riskier assets, effectively pumping up the stock market. While this doesn't justify the high Buffett Indicator on any fundamental basis, it does suggest that the market today is less likely to quickly collapse like it did in 2000, and that it may have reason to stay abnormally high for as long as interest rates are abnormally low.

For additional detail on the effect interest rates have on stock prices, view our Interest Rate Model.

International Sales

A second fair criticism of the Buffett Indicator is that the stock market valuation reflects international activity while GDP does not. Though GDP does include national exports, it would not include something like the sales Amazon makes in India (sourced from Indian fulfillment centers and sellers). However, Amazon's India business is definitely priced into its overall stock price, which is listed in the USA. Imagine if the Indian government banned Amazon from the country and shut down all its operations/subsidiaries there. This would lower Amazon's stock price, which would lower overall US stock market value, but have no impact on US GDP. That is, the Buffett Indicator would fall. Globalization has expanded steadily over the last 50 years and has been a key driver in the growth of the Buffett Indicator over time, since US stocks have risen in value due to overseas activities not included in US GDP.

This is a very fair criticism of the Buffett Indicator itself -- though not necessarily for the valuation model presented here, which looks at the Buffett Indicator relative to it's own exponentially growing trend line. Our model expects exponential growth of the indicator over time, such that we have a "fair" Buffett Indicator value of 50% in 1960, growing to ~120% in 2020. Part of that natural increase is due to technological advances that lead to higher profits for existing firms, or from the creation of new industries entirely. Another part of that natural increase is because US market value is growing faster than GDP due to the rise of international sales of US-based firms. The key point here is that the model is looking at relative performance against the indicator's own trend rate, and not just saying "the Buffett Indicator is high".

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