Testing the Buffett Indicator Outside the U.S.

Is the Buffett Indicator, the ratio of total stock market capitalization to Gross Domestic Product (GDP), a useful indicator of future stock market performance internationally? In their March 2022 paper entitled “The Buffett Indicator: International Evidence”, Laurens Swinkels and Thomas Umlauft extend Buffett Indicator research from the U.S. to 14 international equity markets. Because the value of the indicator varies so much across countries at a given time (for example, 1.48 for the U.S. and 0.55 for Germany at the end of 2019), they first look at time-series predictability of returns by the Buffett Indicator within each country. They then compare predictive power of the Buffett Indicator to those of Shiller’s cyclically-adjusted price-to-earnings ratio (CAPE or P/E10) and mean-reversion in stock returns. Finally, they test a trading strategy that invests in the stock markets of those countries having low values of the Buffett Indicator relative to their respective (expanding window) histories. Using stock market valuation and earnings data and GDP series for 14 countries as available during 1973 through 2019, they find that:

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