PLEASE PAY ATTENTION! AGAIN !

For a long term bull market in Gold and the precious metals we would need a painful bear market in the industrial stocks such as the Dow Jones Industrials and S&P 500 stocks. I have used this gauge since 1986 when Wall Street Week commentator Bob Stovall pointed it out to me as a valuable gauge of overvaluation for the market.

If I couple this valuation analysis with cyclical analysis, it tells me that we are facing a long period of economic weakness and long bear markets…for years! However, it will bring with it a more encompassing bull market in gold.

 From the superb “MoneyandMarkets.com” site

Let’s take a look at the Warren Buffett indicator. Buffett’s favorite back-of-the-envelope metric for market valuation compares the total market cap of the U.S. stock market (defined here as the Wilshire Total Market Index) to U.S. gross domestic product (GDP).

In a nutshell, the Buffett indicator compares the stock market to the economy. The thinking is that economic growth fuels corporate profits. So stock prices cannot outpace economic growth indefinitely.

Today, the stock market is about 150% the size of the economy, close to the highest in history. 

In fact, it’s actually higher than that, as the second quarter’s GDP shrinkage isn’t taken into account here (a shrinking economy makes the figure higher, all else equal).

The Buffett indicator briefly dropped to 120% in March. To put that in perspective, the indicator hit a high of just over 140% during the peak of the 1990s tech mania. That means that during the pits of the COVID-19 bear market, the Buffett indicator was barely below the peak of one of the greatest bubbles in the history of the stock market.

During the 2008 meltdown, the Buffett indicator dropped to about 50%.

It’s always a mistake to read too deeply into a single indicator. While I’m naturally skeptical when I hear that “this time is different,” we do have to consider that some things really do change over time. The market today has a higher allocation to high-margin tech companies. Interest rates and inflation are lower. Stocks are more widely held by a larger swath of the population.