Stocks have endured a terrible start to the year as investors fret about soaring inflation and the Russia-Ukraine war — but the pullback still doesn’t look like a great buying opportunity per a tried and true measure used by legendary investor Warren Buffett.
The “Buffett Indicator” as it’s called by legions of devotees — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is still hovering around a record high even as stock prices are well off their record levels.
In looking at the numbers, the Buffett Indicator stands at about 168.1% — down sharply from highs above 202% in August 2021, per data from GuruFocus.
“The stock market is significantly overvalued according to the Buffett Indicator,” said researchers at GuruFocus. “Based on the historical ratio of total market cap over GDP (currently at 168.1%), it is likely to return 0% a year from this level of valuation, including dividends.”
The Buffett Indicator rose to fame after a 2001 Fortune Magazine article written by Buffett and long-time Fortune writer and Buffett insider Carol Loomis.
“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,” explained Buffett in the article.
Seeing the Buffett Indicator still in significantly overvalued territory is interesting for a few reasons.
First, stocks have been walloped in 2022.
The S&P 500 entered Thursday’s session down 10.6% for the year. That is the sixth worst start to a year for the S&P 500 ever, says strategists at LPL Financial. Further, household names such as Meta (down 39%) and Netflix (down 40%) have been pummeled.
And secondarily, Buffett himself is out there buying shares during this potential period of overvaluation.
The billionaire investor has been adding to his stake in oil giant Occidental Petroleum this month ahead of a key analyst day next week. Buffett just scooped up 18.1 million additional shares of Occidental, giving him a 14.6% stake in the company.
Shares of Occidental are up 98% year-to-date in part fueled by Buffett’s involvement.