Overvalued Market (January 2021)

The "Buffett Indicator" is around 2.00 as of January 7, 2021
The indicator Market-Cap-to-GDP ratio (a.k.a. the Warren Buffett Indicator) is used to determine whether the market is under or over-valued. It is expressed as a fraction: the numerator is the market capitalization represented by the Wilshire 5000 Total Market Index that represents the value of all stocks in the US markets, and the denominator is the Gross Domestic Product (GDP). The quarterly GDP is used as the denominator in the ratio calculation.
The ratio compares the value of all stocks at an aggregate level to the value of the country's total output.
- If the value is around 0.50 (near the historical average for the US market), it is said to be undervalued.
- If the ratio falls between 0.50 and 0.75, the market can be said to be somewhat undervalued.
- If the ratio falls between 0.75 and 0.90 the market can be said to be fairly valued.
- If it is in the range of 0.90 and 1, it is said that the market is modestly overvalued.
- If the value is above 1, the market is said to be overvalued.
As of the date of this post, the ratio is around 2, signaling that the market is super overvalued. The chart attached depicts the historical chart of the ratio comparing the COVID-19 crisis with the 2008 and the dot-com crises.

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