The Buffett Indicator
Jul 29, 2022
Despite Warren Buffett’s claim that the MVE/GDP ratio is “probably the best single measure of where valuations stand at any given moment,” its predictive ability has been the subject of relatively little academic scrutiny. A novel paper by Swinkels and Umlauft (2022) fills this gap and examines whether the MVE/GDP ratio can forecast international equity returns, which complements the existing research limited to the United States. A simple trading strategy that invests in countries with the highest model-predicted returns yields statistically significant and economically meaningful alpha over a corresponding buy-and-hold benchmark while experiencing lower volatility and maximum drawdown.
