Leon Cooperman, the famed investor and market analyst, has sounded doomsday bells about the stock market. As a noted example, he pointed to the Buffett Indicator, which has recently soared to worrying levels. The Buffett indicator is a comparison of the total value of the U.S. stock market against the GDP. Today it’s reached 217%, a level that Warren Buffett described long ago as “playing with fire.” This figure surpasses the peaks observed during the Dotcom Bubble. Perhaps most shocking of all, it beats the heights seen during the 2021 pandemic-era boom.
Given that this indicator tends to predict recessions, the implications would be that equity prices are very much divorced from the economy underlining them. Since April, the S&P 500 has surged nearly 40% and has returned to all-time highs, which raises questions about sustainability and potential risks in the market. Cooperman finds a troubling correlation between these conditions and Buffett’s ominous signals of late-stage bull markets. He cautions that such environments are conducive to bubble creation and elevated risk.
Back in 1999, Warren Buffett cautioned that bull markets don’t end simply because valuations rise to the stratosphere. They usually end with a fit of irrational exuberance as momentum kicks in to drive the rally. As he put it when a new bull market begins and everyone is making money no matter what strategy they employ, it’s a seductive place to be. This attracts a massive new investor pool immune to interest rates as well as any profit-maximizing calculations—they just know it would be silly to stay out of equities.
Cooperman, a vocal opponent of long government bonds amid soaring inflation, says we’re living in “ridiculously high” times. He views the current late-cycle crowd behavior as presenting major risks to equity markets. He maintains that “stocks are less risky than bonds at these levels,” indicating a preference for equities despite his warnings.
The precarious state of the current market valuations as compared to a changing economic fundamental picture has begun inspiring caution amongst investors. The Buffett Indicator is at all time highs. Sure enough, now everyone is asking how much longer this bullish market can go without corrections or bear markets.