The ratio was prescient during the last two downturns. It shot up to 146% at the peak of the dot-com bubble in 2000, a record at the time and well above its average of 89% since 1975, according to numbers compiled by the World Bank.
“This time is different,” the rally cry of investors who spot an irrevocably changed market every few years, is in ample supply these days. Interest rates have reached a permanent low. U.S. stocks have reached a permanent high. FAANG stocks will rule markets for all time. Value investing is dead.
During previous bouts, Warren Buffett, America’s patron saint of investing offered his sage — and inevitably unpopular — perspective. When the dot-com mania raged in the late 1990s, he famously warned against chasing internet stocks. And during the depths of the 2008 financial crisis, he implored investors not to give up on U.S. stocks. Of course, neither episode turned out to be different from the innumerable ones that preceded it, at least when it comes to investing.
This time, Buffett has been uncharacteristically missing from the chatter, but that doesn’t mean his views are any less clear, or any less worth paying attention to.
Let’s start with Buffett’s favorite stock market barometer, the market capitalization-to-GDP ratio. As its name suggests, it measures the total value of the stock market as a percentage of GDP. In simple terms, a lower ratio is bullish and a higher one is bearish.
The ratio was prescient during the last two downturns. It shot up to 146% at the peak of the dot-com bubble in 2000, a record at the time and well above its average of 89% since 1975, according to numbers compiled by the World Bank. It peaked again at 137% just before the financial crisis in 2007. Where is the market cap-to-GDP ratio now? It notched a fresh high of 154% in 2017, according to the latest available number, and is almost certainly higher today given that the U.S. stock market is up roughly 7% since the end of 2017.
So it’s probably safe to say that Buffett doesn’t love the lofty level of the stock market. And judging by the record $122 billion of cash he’s hoarding at Berkshire Hathaway Inc., it’s also safe to assume he doesn’t expect the market to remain elevated forever. Buffett’s cash pile is more than half the value of Berkshire’s $208 billion portfolio of public companies, and since 1987 his cash allocation as a percentage of Berkshire’s portfolio was only higher in the years leading up to the financial crisis.