Buffett Indicator at All-Time Highs: A Cause for Concern?
In 2001, Warren Buffett famously described the stock market capitalization-to-GDP ratio as “the best single measure of where valuations stand at any given moment.”
This ratio, now commonly known as the Buffett Indicator, compares the size of the stock market to that of the economy. A high ratio indicates an overvalued market—and as of February 11, 2021, the ratio has reached all-time highs, indicating that the U.S. stock market is currently strongly overvalued.
Today’s graphic by Current Market Valuation (CMV) provides an overview of how the Buffett Indicator has changed since 1950. We’ll also explain how the ratio is calculated, and why things might not be as dire as seem.
The Buffet Indicator, Explained
Before diving into the data, let’s cover the basics—what is the Buffett Indicator, and how is its value calculated?
The Buffett Indicator is a ratio used by investors to gauge whether the market is undervalued, fair valued, or overvalued. The ratio is measured by dividing the collective value of a country’s stock market by the nation’s GDP.
Measuring Total Value
CMV used the Wilshire 5000 index, along with data from the Federal Reserve for the historical component, to measure the collective value of the U.S. stock market. Here’s a look at the nation’s composite market value since 1950:
As the chart indicates, the market has experienced steady growth since 2010. And as of February 11, 2021, its total value sits at $49.5T.
For the data on GDP since 1950, CMV dipped into the archives from the U.S. Government’s Bureau of Economic Analysis:
While the Bureau’s data is published quarterly, it doesn’t provide the latest figures. So to find Q1 2021 GDP, CMV used data from the Federal Reserve Bank of Atlanta, and came up with an annualized GDP of $21.7T.
According to Warren Buffett, “if the ratio approaches 200%…you are playing with fire.”
And with the current U.S. ratio sitting at 228%—about 88% higher than historical averages, it certainly looks like things are heating up.
Will History Repeat Itself?
As the popular investing expression goes, the trend is your friend. And historically, the Buffett Indicator has predicted several of America’s most devastating economic downturns.
Here’s a look at some historical moments in the U.S. stock market, and where the Buffett Indicator was valued at the time:
|Date||Event||Buffett Indicator||Value (+/- Trendline)|
|October 1987||Black Monday||Fairly Valued||-13%|
|March 2000||Dotcom Bubble||Strongly Overvalued||+71%|
|December 2007||Pre-Financial Crisis||Fairly Valued||+18%|
|March 2009||Financial Crisis Bottom||Undervalued||-46%|
|February 2021||Today||Strongly Overvalued||+88%|
As the table shows, the ratio spiked during the Dotcom Bubble, and was relatively high in the months leading up to the 2008 financial crisis. But does that mean we should take the ratio’s current spike as a warning for a market crash in the near future? According to some experts, we might not need to sound the alarms just yet.
Why are some investors so confident in the current market? One main factor is low interest rates, which are expected to stay low for the foreseeable future.
When interest rates are low, borrowing money becomes cheaper, and future real earnings are theoretically worth more, which can have a positive impact on the stock market. And low interest rates mean smaller returns for low-risk assets like bonds, which lowers investor demand and ultimately boosts stock prices further. Meaning that, as long as interest rates are at record lows, the Buffett Indicator will likely stay high.
However, history has been known to repeat itself. So, while we might not need to fasten our seatbelts just yet, this historically high ratio is certainly worth paying attention to.
Ranked: America’s 20 Biggest Tech Layoffs Since 2020
How bad are the current layoffs in the tech sector? This visual reveals the 20 biggest tech layoffs since the start of the pandemic.
Ranked: America’s 20 Biggest Tech Layoffs This Decade
The events of the last few years could not have been predicted by anyone. From a global pandemic and remote work as the standard, to a subsequent hiring craze, rising inflation, and now, mass layoffs.
Alphabet, Google’s parent company, essentially laid off the equivalent of a small town just weeks ago, letting go of 12,000 people—the biggest layoffs the company has ever seen in its history. Additionally, Amazon and Microsoft have also laid off 10,000 workers each in the last few months, not to mention Meta’s 11,000.
This visual puts the current layoffs in the tech industry in context and ranks the 20 biggest tech layoffs of the 2020s using data from the tracker, Layoffs.fyi.
The Top 20 Layoffs of the 2020s
Since 2020, layoffs in the tech industry have been significant, accelerating in 2022 in particular. Here’s a look at the companies that laid off the most people over the last three years.
|Rank||Company||# Laid Off||% of Workforce||As of|
Layoffs were high in 2020 thanks to the COVID-19 pandemic, halting the global economy and forcing staff reductions worldwide. After that, things were steady until the economic uncertainty of last year, which ultimately led to large-scale layoffs in tech—with many of the biggest cuts happening in the past three months.
The Cause of Layoffs
Most workforce slashings are being blamed on the impending recession. Companies are claiming they are forced to cut down the excess of the hiring boom that followed the pandemic.
Additionally, during this hiring craze competition was fierce, resulting in higher salaries for workers, which is now translating in an increased need to trim the fat thanks to the current economic conditions.
Of course, the factors leading up to these recent layoffs are more nuanced than simple over-hiring plus recession narrative. In truth, there appears to be a culture shift occurring at many of America’s tech companies. As Rani Molla and Shirin Ghaffary from Recode have astutely pointed out, tech giants really want you to know they’re behaving like scrappy startups again.
Twitter’s highly publicized headcount reduction in late 2022 occurred for reasons beyond just macroeconomic factors. Elon Musk’s goal of doing more with a smaller team seemed to resonate with other founders and executives in Silicon Valley, providing an opening for others in tech space to cut down on labor costs as well. In just one example, Mark Zuckerberg hailed 2023 as the “year of efficiency” for Meta.
Meanwhile, over at Google, 12,000 jobs were put on the chopping block as the company repositions itself to win the AI race. In the words of Google’s own CEO:
“Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today… We have a substantial opportunity in front of us with AI across our products and are prepared to approach it boldly and responsibly.”– Sundar Pichai
The Bigger Picture in the U.S. Job Market
Beyond the tech sector, job openings continue to rise. Recent data from the Bureau of Labor Statistics (BLS) revealed a total of 11 million job openings across the U.S., an increase of almost 7% month-over-month. This means that for every unemployed worker in America right now there are 1.9 job openings available.
Additionally, hiring increased significantly in January, with employers adding 517,000 jobs. While the BLS did report a decrease in openings in information-based industries, openings are increasing rapidly especially in the food services, retail trade, and construction industries.
Datastream4 days ago
Ranked: The Top Online Music Services in the U.S. by Monthly Users
Automotive2 weeks ago
The Most Fuel Efficient Cars From 1975 to Today
Datastream1 day ago
Super-Sized Bets for Football’s Big Game (2013-2022)
Technology4 weeks ago
Prediction Consensus: What the Experts See Coming in 2023
VC+2 weeks ago
Get VC+ Before Prices Increase on February 1st
Technology10 hours ago
Ranked: America’s 20 Biggest Tech Layoffs Since 2020
Energy4 weeks ago
Mapped: Biggest Sources of Electricity by State and Province
Economy2 weeks ago
The $16 Trillion European Union Economy