This Stock Market Metric Suggests Investors May Be "Playing With Fire." Should You Be Worried Right Now?

As the existent bull marketplace rages on, present midway into its 3rd year, immoderate investors are opening to interest that the tides are turning. According to the astir caller play survey from the American Association of Individual Investors, a whopping 60% of U.S. investors consciousness bearish astir the market's aboriginal -- the highest that fig has been successful the past 12 months.

Nobody tin accidental erstwhile the adjacent downturn volition begin, but there's 1 banal marketplace metric investors whitethorn privation to support an oculus on. Here's what past says astir times similar these and however to hole your portfolio accordingly.

The "Buffett Indicator," popularized by capitalist Warren Buffett, examines the ratio betwixt the full market cap of U.S. stocks and gross home merchandise (GDP). In 2001, Fortune published an nonfiction based connected Buffett's prediction 2 years earlier that the banal marketplace was connected the verge of a superior downturn. He made that prediction with assistance from the Buffett Indicator, explaining that erstwhile this ratio gets excessively high, it could awesome that a marketplace slump is ahead.

"If the percent narration falls to the 70% oregon 80% area, buying stocks is apt to enactment precise good for you," helium explains. "If the ratio approaches 200% -- arsenic it did successful 1999 and a portion of 2000 -- you are playing with fire."

As of February 2025, the Buffett Indicator sits astatine conscionable implicit 205%. The past clip this fig neared 200% was successful November 2021, erstwhile it reached 193% -- and soon after, successful January 2022, the marketplace descended into a carnivore market.

To beryllium clear, nary banal marketplace indicators are wholly accurate, and the Buffett Indicator besides has its flaws.

For example, corporations and economical conditions person drastically changed implicit the past mates of decades, mostly owed to technological advancements. Companies, successful general, person overmuch higher valuations than they did adjacent a decennary ago, truthful older metrics, similar the Buffett Indicator, whitethorn not beryllium arsenic close successful determining whether stocks are overvalued oregon undervalued.

Case successful point: The Buffett Indicator metric has not dipped beneath 100% since April 2013, suggesting that stocks person been overvalued for the past 12 years. Yet, successful that time, the S&P 500 (SNPINDEX: ^GSPC) has soared by 281%, arsenic of this writing. If you'd stopped investing due to the fact that this metric implied it wasn't the perfect clip to bargain stocks, you'd person missed retired connected superior gains.

Also, utilizing the market's past show to foretell aboriginal returns is ever risky. Stocks tin beryllium unpredictable astatine times, and adjacent Warren Buffett himself can't accidental wherever the marketplace volition beryllium successful a fewer months oregon a year. Even the astir close marketplace indicators tin inactive beryllium incorrect sometimes, and erstwhile your fiscal aboriginal is astatine stake, it's omniscient to debar relying excessively heavy connected immoderate azygous metric.