The Buffett Indicator Revisited: Market Cap-to-GDP and Valuations CFA Institute Enterprising Investor

He’s expanded DQYDJ to build visualizations, calculators, and interactive tools. But really, it doesn’t matter as long as your indicators are constant and the methodology doesn’t change. You need a consistent look over many market conditions if you’re going to use the indicator as input. The tool will auto-populate with quarterly data back to thefirst quarter of 1952. If you choose to use the Wilshire method, it will also use a recent closing price for the Wilshire 5000 – check the box for the specific close. The Wilshire 5000 “Full Cap” Price Index(multipliedby $1.15 billion –see Wilshire’s note).

Please be aware that if the total assets is displayed as zero or – , it suggests that there’s no data available rather than the original data being zero. In this case, the modified version of both the ratio and projected annualized market return will be treated the same as the original version. The reason he says this is that it’s a simple way of looking at the value of all stocks on an aggregate level, and comparing that value to the country’s total output, which is its gross domestic product. This relates very closely to a price-to-sales ratio, which is a very high-level form of valuation. The Buffett indicator (or the Buffett metric, or the Market capitalization-to-GDP ratio) is a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time. The Buffett Indicator is a ratio used by investors to gauge whether the market is undervalued, fair valued, or overvalued.

buffett indicator india today

Analysts at Anand Rathi Financial Services have raised the 12-month Nifty 50 index target to 16,500 from 15,800 earlier. Based on Nifty 50 member companies with the latest available Nifty 50 weights incorporating the recent one-month median estimate, earnings yield and target multiples, the brokerage firm upped the target by 4.4 per cent. Even if the cycle reverses, and profits start to rise, what does a sustainable level of profits for India look like given the country’s socio-economic structure? Indeed, while Indian profits fell sharply and consistently after peaking at 4.7% of GDP in 2007–2008, the US corporate sector sustained its profits ratio save for a short-lived plunge during the global financial crisis . While they stabilized in 2018–2019, with the outbreak of the COVID-19 pandemic, the line has trended down again in 2019–2020 and will likely continue to in 2020–2021. Analysts at BofA Securities point out that Nifty’s two year forward PE at 19 times is at a peak, and an 8% premium to long-term average, thus limiting future upside.

This is the Warren Buffett Indicator, the total market cap relative to the US gross domestic product . For the market cap typically the Wilshire 5000 total market cap is used, which is representing the value of all stocks traded in the United States. The Bombay Stock Exchange SENSEX also referred to as BSE 30 is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The Market Cap to GDP Ratio is a measure of the total value of all publicly-traded stocks in a country, divided by that country’s Gross Domestic Product . It used as a broad way of assessing whether the country’s stock market is overvalued or undervalued, compared to a historical average.


It is also likely that many of these companies in future are also included in the benchmark indices like Nifty and Sensex thereby elevating both the Total Market cap and PE ratio of these indices. Of course, this entry will come at the expense of old economy stocks like PSUs and commodity cyclicals. The Warren Buffet Indicator has already become less relevant in the case of Indian markets. Because this indicator completely ignores the rise in private equity investments.

buffett indicator india today

Generally speaking, the Fed buys assets as a part of its monetary policy whenever it intends to increase the money supply and sells assets when it intends to decrease the money supply. If the Fed’s goal is expansionary, it pours more money into the market and drifts down the interest rate. In this case, money can be borrowed at a lower rate, which drives individuals to consume and corporate to expand their business. On the other hand, an enormous drop in interest rates also promotes investment, as it makes a dollar of future profit much more valuable. Both results may lead to an inflow into the stock market, thus increasing the total market cap. The Buffett Indicator is a broad measure of stock market valuations.

Amit has over 15 years of experience in investment analysis and portfolio management. He had set up the research desk at Fintrekk Capital across multiple asset classes. In his previous stints, he has worked as a business consultant and analyst with leading MNCs and start-ups over diverse fields of Healthcare, Education and Retail.

India Historical GDP Growth

S&P BSE Sensex and Nifty 50 index both declined by 3.1 per cent and 2.5 per cent, respectively, to settle at 46,285.77 and 13,634.60, at the end of the month of January. While the Goods and Services Tax collection in January recorded an all-time high of Rs 1.2 lakh crore. Indian share markets have seen a sharp run-up in the last few sessions on the back of improved macros and positive global sentiments. With financial sector shares contributing big, BSE Sensex notched 52,000-mark, while Nifty 50 logged a fresh record high, topping 15,300.

buffett indicator india today

The best investment strategies are long-term diversified holdings, not frequent trading or market timing. Please see the About page for additional information and disclosures. Aggregate index score shown is the equally weighted average of our six core valuation models, shown below. Each model in the index uses historical data to determine a baseline. Current model values are expressed in terms of the current data’s number of standard deviations above or below that baseline trend. All else being equal, if there was a large increase in the percentage of companies that are public vs private the Buffett Indicator would go up, even though nothing has changed from a valuation perspective.

In both cases, the Federal Reserve stepped up to buy more mortgage bonds, bringing spreads and mortgage rates down, as spreads on mortgage bonds are a key component in the mortgage rates ultimately charged to borrowers. We can see that, during the past five decades, the TMC/GNP ratio has varied within a very wide range. Based on current value and historical month-end values, the lowest point was about 32.7% in the previous deep recession in buffett indicator india today July 1982, while the highest point was about 202.5% in August 2021. The market went from Significantly undervalued in July 1982 to Significantly overvalued in August 2021. The market only encompasses the value of all the listed companies in the country. But the GDP is the value of all incomes which includes unlisted private companies, small businesses, MSMEs, proprietorship, partnerships, government companies, government departments etc.

Share of Profits as a Proportion of GDP

There are multiple levers for growth in our markets which should start showing in the current calendar year. Continuations of reforms as well as strong global and domestic liquidity is likely to keep the momentum going for Indian markets, suggest experts. Or more technically, item NCBEILQ027S, from Line 62 in the F.103 balance sheet of Table S.5.q of the “Integrated Macroeconomic Accounts for the United States” file. The indicator set an all-time high during the so-called “everything bubble”, crossing the 200% level in February 2021; a level that Buffett warned if crossed, was “playing with fire”. It’ll be interesting to see what changes in the next decade, as fast food companies continue to invest in their digital offers and tech support.

It uses a number of metrics to determine this, including total sales (which we’ve covered in a previous article), average-unit volume , and growth figures. The degree to which stock markets penetrate into economic activities varies from one nation to the next. This divergence holds true regardless of whether countries are developed or developing, capitalist or socialist. The bill would forbid federal officials from holding individual investments unless they’re in a qualified blind trust.

  • Large companies such as insurance companies have added significant market capitalisation in recent years in India.
  • We use “Wilshire 5000 Full Cap Price Index” to do the actual return calculation.
  • The market participants might have to evolve new parameters for valuing the market that would be appropriate in the evolving scenario.

Valuation 101 teaches that a stock’s price is the present value of all its future earnings and cash flows. Thus, a country’s stock market capitalization is the aggregate of the present value of all the combined future earnings of all its listed stocks. To understand the underlying logic of the Buffett Indicator — the ratio of total market cap to GNP, we must understand the economic cycle. The premise is that an economy is mainly driven by consumption and individuals must produce to consume.

So to find Q GDP, CMV used data from the Federal Reserve Bank of Atlanta, and came up with an annualized GDP of $21.7T. Buffett has said the gauge spiking is a “very strong warning signal” of a future market crash. As retail inflation continues to rise for the seventh month, RBI aims to restrict it in the range of 2-6%, but has failed to do so despite embarking on a rate hike spree. PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions.

The ratio is measured by dividing the collective value of a country’s stock market by the nation’s GDP. The Buffett Indicator is a market valuation measure, also known as the stock market capitalization to Gross Domestic Product ratio. For comparisons over different time frames to have merit, the share of profits of listed companies should be broadly consistent with the profits of unlisted companies. After all, creative destruction ensures new firms and sectors disrupt the old. If amid this process, the proportion of aggregate profits flowing through stock markets is broadly constant, the ratio is useful. India’s GDP growth is poised for a recovery but the robust rally in Indian stock markets could keep this ratio at elevated levels.

The Buffett Indicator at All-Time Highs: Is This Cause for Concern?

For these reasons, it’s a much better measure for ‘market cap’ than the Dow Jones. The applicability of the buffett indicator is higher when the market cap reflects a much larger share of economic activity in the country. That is why the ratio is widely used in the advanced/developed countries like the US, UK, Singapore, Germany, Sweden where more of business comes under the formal sector. In current Equity market outlook as on March 18, 2021, India’s Market Cap to GDP ratio jumped 104 from 56 in March 2020. So, from the above monthly trend graph, we can say that current equity valuations are considerably well above the historical average of 74.

Intrinsic value calculator based on Warren Buffet’s and Ben Graham’s work In value investing determing the true value of a COMPANY instead of a stock price is crucial. This little indicator shows the “Intrinsic value” of the choosen stock meaning the value of the stock in 10 years time. Calculation is based on historical book value’s average annual growth… We can compute the predicted and actual returns of the India stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle.

Intuitively, the stock market and the overall economyshould grow with a similar pace. As with any indicator (such as theShiller PE or CAPE, S&P 500 Price to Peak Earnings, or Tobin’s Q applied to the full-market), broad valuation measures are perhaps a useful input but not necessarily the whole story. They may have worked historically, but unprecedented conditions – such as extended periods of low interest rates, or more globalized companies in an index – may mean indicators don’t work in the same way. It originated in aDecember 2001 interviewwith Carol Loomis, where Warren Buffett discussed his favorite way to quantify stock valuation on a macro level. Originally, he discussed dividing market capitalization by (the then-popular) Gross National Product. Profits make up much of Saudi Arabia’s GDP since its economy depends on the low-cost high-profit oil industry.

Over the long term, corporate profitability reverts to its long term-trend, which is around 6%. During recessions, corporate profit margins shrink, and during economic growth periods, corporate profit margins expand. However, long-term growth of corporate https://1investing.in/ profitability is close to long-term economic growth. Although GNP is different from GDP , the two numbers have always been within 1% of each other. The U.S. GDP since 1970 is represented by the green line in the first of the four charts to the right.

Finally, this ratio is impacted by trends in Initial Public Offerings , and the percentage of companies that are publicly traded . All else being equal, if there was a large increase in the percentage of companies that are public vs. private, the Market Cap to GDP ratio would go up, even though nothing has changed from a valuation perspective. These indicators shouldn’t be used to make ‘broad-based’ conclusions,” he said. India’s share in the world market cap is at 2.3 percent, dropping below its long-term average of 2.4 percent. Over the last 12 months, world market cap has increased 53.5 percent (USD35.7t), while India’s market cap is up 52 percent. What’s in the future for investors–another roaring bull market or more upset stomach?

And for India, the latest numbers are at 70% and has rarely gone upwards of 100%. Even though we witnessed a few remarkable milestones, the Indian market has quite a distance to traverse. Which is why more analysis is needed to determine the Buffett Indicator’s limitations and applications for valuations in India and across the world.

The same is true for companies like Microsoft, Facebook, and Google. Get live Share Market updates and latest India News and business news on Financial Express. “Things are different now.”(?) Well, maybe since there are trillions in negative interest bonds moving around the world as if they were a good idea. If bonds have changed in definition and function, it makes sense that stocks would too.

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