Markets at lifetime high: Is it an investment opportunity or a risk?
I suppose it is tempting, if the only tool you have is hammer, to treat everything as if it were a nail" – Abraham Maslow
On 16 January 2023, the Sensex reached its all-time high of 73,427 causing the market-to-GDP ratio, also known as the Buffet Indicator, to climb to 120%. Essentially, it measures the total stock market capitalization of a country relative to its GDP and is expressed as a percentage. This provides an indication of whether a country’s stock market is overvalued or undervalued in relation to the size of its economy. The 10-year average of this ratio is around 87%, suggesting a potential correction or bear market on the horizon. According to this measure, it implies that the market is running ahead while the GDP needs to catch up—putting the cart before the horse, so to speak.
While the market-to-GDP ratio is an important metric, it is not without its drawbacks. The most significant drawback is that it doesn’t consider certain economic factors, such as interest rates and inflation, which can significantly impact stock market valuations. Additionally, the composition of a country’s stock market may not accurately reflect the overall economy, especially in nations where specific sectors dominate the market. For instance, if the services sector dominates the stock market but represents a smaller portion of the GDP, this ratio would not provide a true picture. So, depending on which side of the spectrum one falls on, they would either follow this ratio religiously or not look at it in isolation. Either way, there are a few things that long-term investors can do that are not focused on a single data point but are more tied to their own behaviour towards risk. Before rebalancing their long-term portfolio,
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