In an earlier forecast for 2024, a well-known and often controversial Wall Street expert raised concerns about an impending inflation crisis that was deemed highly predictable. However, as we approach the midpoint of the year, it seems that inflation is not the only crisis on the horizon that can be easily anticipated, given the multitude of indicators pointing towards an upcoming recession.
The latest addition to these indicators is the Buffett indicator, which compares the total market capitalization of publicly-traded companies in a country to its national gross domestic product (GDP). This tool is used to assess whether stocks are generally over or undervalued. It has earned its name from the renowned investor, Warren Buffett, who highlighted it as one of the best methods to gauge valuation levels in a 2001 interview.
What makes these readings concerning is the historical trend of the indicator surging prior to almost every recession experienced in the United States, regardless of its magnitude. Although the valuation-to-GDP ratio is not currently at record highs – standing at around 217% in 2020 – it is still significantly above the levels observed before the burst of the Dot-com bubble and the onset of the Great Recession in 2007, at 197%.
While the Buffett indicator does not guarantee a market crash, its reading should give investors pause, especially considering that it is well above the range typically associated with an accurately-priced stock market, which is up to 100%. However, this metric is not the only one indicating the presence of a bubble. In February, the concentration of gains among the ten largest firms, accounting for 77% of the SPX, raised concerns due to its similarity to the situation in 1929.
Furthermore, several prominent analysts and experts, known for accurately predicting past crises, have expressed their belief that the technology sector has become a significant bubble. However, there is still disagreement about whether this bubble will burst, with many still arguing that the current boom is sustainable.
