Are we in a stock market bubble| The Buffett indicator explained

Time after time, crashes have been inevitable. Investors naively believing the market will continue in it’s relentless bullish uptrend have failed countless times. Many have tried to create indicators to define market conditions, with only one gaining popularity by many investors, one that is simple enough to be timeless, and one that is even vouched by one of the greatest investors himself Warren buffett. So after 13 years of the market going up, a question is raised into concern: Are we in a stock market bubble? The buffet indicator explained. To start off, let's figure out how exactly the buffet indicator is measured. The indicator essentially takes the total valuation of the US stock market and divides it by the total output of the US economy. The theory behind this is that if a company is worth more than what they make, poor returns are bound to happen. The specific measurements used today to value the stock market is the S&P 500, or sometimes the broader Wilshire index 5000 instead. To value the total economy, the US GDP is used. By dividing the valuation of the securities market by the total valuation of the US economy, and multiplying that value by 100, you can get the percentage that defines the valuations of the market. Now let’s talk about what this percentage means. 100% is the fair value as the stock market is representing 100% of what the total US economy is outputting. Anything above 100% would indicate the stock market being overvalued, and likewise, anything under 100% would indicate the stock market being undervalued. According to Warren Buffet, if the ratio is 70% - 80 %, it would be a good time to buy as the stock market is at a discount. On the other hand, if the value is 200%, quoting Warren Buffett, you are playing with fire. Today, the buffet indicator values the stock market at a whopping 233%. Meaning that that the market is more than twice the value of what the US economy is outputting. It can be clearly seen that today’s market is very overvalued. However, If there is one criticism of the Buffett indicator, it’s that it doesn’t take into consideration other asset classes that might affect the stock market as a whole. For example, one of the biggest cases today is the bond market. Because of abnormally low interest rates today, the bond market doesn’t have too good of a return, which forces investors to pump up the stock market. This can explain why today’s market valuation is mind-bogglingly high. This can lead the stock market to higher levels than ever seen before, as it’s the only investment that investors might get a good return on. In conclusion, the Buffett indicator is the ratio between the valuation of the stock market and the valuation of the US economy. It can be a useful tool to gauge the valuation of the overall securities market, and if used right, can help you prepare for present and future market conditions. And that is all. If you want more of these videos, hit the like and subscribe button, and have a wonderful day.