Warren Buffett’s Favorite Indicator

Warren Buffett’s favorite indicator for analyzing the valuation of the stock market is the market capitalization of the stock market divided by gross domestic product (GDP). NIA has just created brand new must see market cap/GDP ratio charts for 11 of the world’s largest stock markets covering 73% of the total global stock market valuation. These are long-term daily charts going back 20+ years and they include zones that show when each market becomes extremely overvalued, overvalued, undervalued, and extremely undervalued.

The market cap of the NASDAQ has just reached a new all-time high of $8.705 trillion equal to 45.8% of U.S. GDP. The long-term median NASDAQ market cap/GDP ratio is only 24.91%. The current NASDAQ market cap/GDP ratio of 45.8% is the highest since October 23, 2000. At that time, the NASDAQ was trading for 3,469 and over the following 11 months the NASDAQ declined by 59% to 1,423.

Out of the last 6,162 trading days going back to the beginning of 1993, the NASDAQ has been more overvalued than today with a market cap/GDP ratio exceeding its current level of 45.8% on a total of only 201 trading days or 3.26% of the time. This means the NASDAQ’s valuation is currently at a percentile of 96.74% – putting it in NIA’s extremely overvalued crash warning zone.

When the NASDAQ’s valuation last entered the extremely overvalued crash warning zone in 2015, the NASDAQ reached a short-term closing peak on July 20, 2015 of 5,219 where it had a market cap/GDP ratio of 42.3%. Over the following 7 months, the NASDAQ dipped by 18.24% to a closing low on February 11, 2016 of 4,267.

The only global stock market more overvalued than the NASDAQ at this time is the Stock Exchange of Thailand, which is currently valued at a market cap/GDP ratio of 107.98%, near its record high of 112.97%.

Just behind the NASDAQ and also extremely overvalued is the Japan Nikkei, which is currently valued at a market cap/GDP ratio of 107.61%, near its multi-decade high of 115.77%.

China’s version of the NASDAQ the Shenzhen Exchange is also extremely overvalued in the crash warning zone with a market cap/GDP ratio of 29.26%, more than double its long-term median of 14.38%.

The German stock market has just entered the extremely overvalued crash warning zone with a market cap/GDP ratio of 58.01%.

The Hong Kong Hang Seng market just fell out of the extremely overvalued crash warning zone and back into the overvalued zone.

The National Stock Exchange of India just reached a new record high market cap, but due to India’s rapidly growing economy it remains only in the overvalued zone.

The New York Stock Exchange (NYSE) is currently in the overvalued zone with a market cap/GDP ratio of 106.41%, which is still below its record high market cap/GDP ratio of 128.41% reached on June 30, 1999.

The Shanghai Stock Exchange after declining in recent weeks is no longer overvalued. It currently trades with a market cap/GDP ratio of 38.75%, which is above its long-term median of 27.34% but well below its record high of 105.13% reached on November 5, 2007.

The United Kingdom’s London Stock Exchange is relatively attractive compared to the rest of the world with a market cap/GDP ratio of 119.2%, barely above its long-term median of 113.91% and well below its record high of 190.7% reached on December 30, 1999.

Malaysian stocks are also somewhat attractive with a market cap/GDP ratio of 149.24%, barely above its long-term median of 142.91% and well below its record high of 335.09% reached on December 31, 1993.