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What does the Warren Buffet Indicator tell us about the stock market with Nifty at 10k?
Warren Buffett described the Mcap/GDP ratio as the single best measure of where valuations stand at any given moment.
With Sensex at 32,000 and Nifty at 10,000 and with both indices at all time highs as a value investor it should raise caution and sense of alarm in you. InFact iconic investor Howard Marks in his memo of July 2017 has issued a warning that we may experience a market crash like 2008 in the near future as there were signs that greed is driving the market.
In an article in 2001 for Fortune Magazine, Warren buffet described the Market Cap to GDP as the single best measure of where valuations stand at any given moment.
Market Capital to GDP Ratio
The Buffet Indicator or Market Cap to GDP Ratio keeps a check on the valuation and sentiment of any market. Any movement much above or below the 100 percent level provides an indication to the investor that whether the current valuation is overvalued or undervalued.
The market cap which is the numerator tells us the market value of all the businesses in the country. The denominator which is the Gross Domestic Product (GDP) tells the actual performance and size of the economy. Because the stock market logically is an indicator of the economy and should follow it in the long term any deviation in the short term due to sentiments for the 100% mark, tells us whether the market is over overvalued or undervalued.
The Current Scenario as of 31st July 2017
With Sensex at 32,000 levels, the current market capitalization of BSE is at 1,31,98,140 crores. (Source: BSE website)
The GDP of India is approximately 1,45,26,412 crores (considering a 7% growth in 2017 and GDP at market prices). (RBI Website).
This pegs the Market Cap to GDP ratio for July 2017 at 1,31,98,140/1,45,26,412 = 90.85%.
With the Buffet indicator at 90.85%, it tells us that the market is almost fairly valued and we are still around 20-30% away from a bubble. It will be interesting to keep an eye on this indicator in the coming days with the full impact of GST kicking in and hopefully good monsoons, as it is a play on stock market levels and GDP growth of India.
One must note that this is only one indicator and should be taken as a rough estimate rather than a real indicator.