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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.

Click here to see NIA’s brand new market cap/GDP ratio charts of the NASDAQ, NYSE, Shanghai, Shenzhen, Hang Seng, Nikkei, Frankfurt Stock Exchange, London Stock Exchange, National Stock Exchange of India, the Stock Exchange of Thailand, and Bursa Malaysia!

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