Warren Buffett Total Stock Market Value to GNP Ratio Reviewed

by: MyPlanIQ

In his 2001 Fortune magazine article, Warren Buffett used the ratio of the market value of all US publically traded securities to Gross National Product (GNP) as a yardstick to measure the stock market valuation.

He stated,

The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.

If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire.

We have been tracking this index and present the current status. This will be reported every other week (bi-weekly).

click to enlarge

The current ratio is at 84%, which is in the fair market range. The smart money indicators have around 70% in equities and 30% in fixed income.

This seeming imbalance could be caused by low expectations in the bond markets with interest rates being so low or a cause for concern that the appetite for equities is over stated.

Disclosure: No positions