Warren Buffett's favorite market indicator nears record high, signaling stocks are overvalued and a crash may be coming

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The famed investor said it was a 'very strong warning signal' when the gauge peaked before the dot-com crash.

in 2001 as "probably the best single measure of where valuations stand at any given moment."

The famed investor and Berkshire Hathaway CEO added that when the ratio spiked to a record high during the dot-com boom, it"should have been a very strong warning signal" of an impending crash. The Buffett indicator also surged in the months before the 2008 financial crisis, giving it a solid track record of predicting market downturns.

However, the gauge is far from perfect. Comparing the current value of stocks to the previous quarter's GDP isn't ideal, US-listed companies don't necessarily contribute to the American economy, and GDP doesn't account for overseas income. The COVID-19 pandemic has also caused massive disruptions to economic activity and temporarily depressed GDP, boosting the Buffett indicator's readings in recent months. However, stocks appear extremely expensive byHere's the St Louis Fed's version of the Buffett indicator :

 

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