Are You Watching the Buffett Indicator? You Should Be
Whether you agree with Warren Buffett’s investing philosophies or not, there’s no denying that his opinions are listened to closely within the investing community. His recent decision to divest himself of airline stocks resulted in many other investors doing the same thing, with airline stocks getting hammered. And there’s one vital stock market indicator that he pays attention to that everyone should pay attention to too. Right now, that indicator is flashing warning signals that stock markets are poised for a major crash.
The “Buffett Indicator” is so named because it’s a number that Buffett sees as indicative of the health of stock markets. It’s a very simple indicator, just the ratio of total stock market capitalization to total gross domestic product (GDP). Every time that indicator gets too high, it’s a warning that a stock market crash is imminent.
Right now the Buffett Indicator is at record highs. That’s a combination of both stock markets that have recovered from their earlier lows and of an economy whose output is getting hammered by the economic shutdowns that are occurring across the country. With an increasing numerator and a declining denominator, the Buffett Indicator is out of control.
In fact, by most indicators stock markets are now more overvalued than ever. Price to earnings ratios are also skyrocketing, as stock prices remain high while earnings are plummeting. Yet despite all the negative forward guidance, stock markets are behaving as though everything is normal and the economy is going to bounce back to normal. Boy will they get a wake-up call when the crash occurs.
Investors will get a rude awakening too, particularly if they haven’t prepared themselves and protected their investment portfolios. And with the crash growing closer by the day, time is growing short to protect those portfolios.
Many investors have already made the move to gold and silver, choosing to protect their retirement savings by rolling over 401(k) assets into a gold IRA. It’s an easy choice to make for investors who know they want to take advantage of the numerous benefits gold offers, and it’s an easy move to make. Investors can roll over funds from a 401(k) to a gold IRA with ease, without tax consequences, and rest easy once their assets are protected.
With stock markets set to drop and gold set to soar, investors who are currently sitting on the fence need to make a decision: stick to stock markets and try to ride out losses that could end up being 50-80% or more, or protect part of their portfolio with gold, which has the potential to make gains of 50% or more in the coming years. What will you choose?