Last month’s brutal stock market correction wiped $3.6 trillion from equities in one week. Further, within the space of nine days the S&P 500 Index crashed 10% from an all time high in the shortest ever amount of time. After such a mighty rout, investors are wondering if the stock market is near the bottom yet. A financial analyst at Barron’s is watching the technical indicators for a bottom.
Famous Buffett indicator flashed red before the Dot Com bubble. Then again before the 2008 financial crisis that caused the Great Recession. The Buffett indicator is simply the entire stock market capitalization of the United States divided by U.S. gross domestic product (GDP). Warren Buffett argues if that number is too high, it means U.S. companies aren’t producing enough to be worth their valuations on the stock market. Therefore a downward price correction is inevitable.
On the first day of trading in 2020, the indicator charted an ominous record high of 153%. This perilous situation for stock prices did not go unnoticed on CCN.com Market News. Just before the Dot Com bubble burst, U.S. market cap was 146% of GDP. Then before the 2008 Financial Crisis, it was 137% of GDP. After the correction started in February, the indicator has declined some, but as of Mar. 4, it was still a sky high 146%.
So valuations relative to production are now back down to what they were just before the last two big stock market crashes. According to Warren Buffett’s theory, that means the market correction to stock prices has hardly even begun.
Buffett Indicator: Stock Market Death Spiral Isn’t Over Yet, CCN, Mar 9
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