Warren Buffett’s stock market indicator has reached a historic high and could be predicting a potential crash, according to a report by Business Insider.
The indicator, colloquially named after the US billionaire investor, can be used by value investors to help judge the relative valuation of stocks.
Investors can use it to estimate whether the stock market is overvalued or undervalued relative to the size of the economy.
Mr Buffett previously described the indicator as “probably the best single measure of where valuations stand at any given moment”, in a Fortune article in December 2001.
Worryingly, the indicator is said to have climbed to a record high and as a result, is potentially poised for a downturn.
On Thursday, the indicator was reported to have reached a historic 179% as the market rebounded from the coronavirus sell-off, well above the average reading of 107% over the past 20 years.
It has a strong history of predicting when the market may fall. Before the 2008 financial crisis, the indicator capped 100%.
“Nearly two years ago the ratio rose to an unprecedented level,” Mr Buffett said in the Fortune article. “That should have been a very strong warning signal.”
The indicator has limitations and has been said to have been proven somewhat less reliable in the current market. However, the latest peak reading is still a large point of concern for investors.
