There's a market valuation metric that Warren Buffett once called "probably the best single measure of where valuations stand at any given moment." Right now, that gauge is flashing a number that should at least get your attention: 220%.
This is the Buffett Indicator — the ratio of total U.S. stock market capitalization to gross domestic product. The math is simple: divide the total value of all U.S. publicly traded stocks (tracked via the Wilshire 5000 index) by U.S. GDP, and multiply by 100. A reading of 100% means the market is roughly equal in value to the entire output of the U.S. economy for a year. A reading of 220% means the market is valued at more than twice annual GDP.
For context: the Buffett Indicator hit roughly 140% before the dot-com crash in 2000. It was around 105% before the 2008 financial crisis. Buffett himself has historically used a threshold of approximately 120% as a signal to become more cautious.
Today's reading of 220% — based on current Wilshire 5000 market cap data relative to U.S. GDP figures — is territory we have not seen before.
What Berkshire is actually doing
Berkshire Hathaway's most recent 13-F filing and annual report reveal that the company is sitting on approximately $334 billion in cash and equivalents — a record. Berkshire has been a net seller of equities for roughly eight consecutive quarters. That means the world's most famous long-term investor has been consistently selling more stock than he's been buying, for two straight years.
If you're looking for the single most behavioral signal the Buffett Indicator comes with, that's it. The man who invented the metric is sitting on the largest cash pile in his company's history.
So should you panic? No. Here's the nuance.
Buffett has also said, repeatedly and on the record, "never bet against America." He is a long-term structural bull on the U.S. economy. The Buffett Indicator has been elevated — running above its historical averages — for most of the past decade, and anyone who sold equities entirely based on a reading above 150% in 2017 missed one of the great bull runs in market history.
