Warren Buffett doesn’t throw around superlatives lightly. So when he told Fortune Magazine back in 2001 that the ratio of stock market value to GDP was “probably the best single measure of where valuations stand at any given moment,” people paid attention. Two decades later, that metric—now universally known as the Buffett Indicator—has become a fixture in market analysis. And right now, it’s flashing a warning signal that’s hard to ignore.
The concept is elegantly simple. Take the total value of all publicly traded stocks in the country and divide it by the nation’s GDP. The result tells you whether the market is fairly priced relative to the underlying economy. When stocks are worth significantly more than the economy produces, you’ve got a problem—at least in theory.
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