Normalized Buffett Indicator (NBI)

How expensive is the market right now?

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Inexpensive
Fair
Expensive
Ruinous
Normalized Buffett Indicator (NBI)
Indicator TypeValuation
Scale 0 - 100
Absolute Value Range 15.39 to 194.52
Historical Data Date RangeJan 2, 1992 - May 17, 2024
Last UpdatedMay 17, 2024 7:58 PM EST
Historical Data
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Indicator Description

The Normalized Buffett Indicator (NBI) is a financial metric designed to enhance the insightful perspective offered by the traditional Buffett Indicator. This innovative valuation indicator acknowledges the dynamic nature of profit margins within the S&P 500 and introduces a normalizing effect to better capture the nuanced relationship between market capitalization, economic output, and profit margins. Abbreviated as NBI, this indicator offers investors a refined tool for assessing market valuations by accounting for the influence of varying profit margins on overall market conditions.

Formula: (total Wilshire 5000 market cap / GDP) / 24-month SMA of SPX profit margin

Since 1992, the NBI has ranged between 15.39 and 194.52 with a mean of 76.74 and a median of 59.71. Both higher absolute and scaled (0 - 100) NBI values indicate more expensive equities.

NBI is defined as the ratio of the total market capitalization of the Wilshire 5000 index to the Gross Domestic Product (GDP), divided by the 24-month simple moving average (SMA) of the S&P 500 profit margin. This multi-faceted formula integrates three critical elements, creating a comprehensive indicator that addresses the inherent variability in profit margins and their impact on market valuations.

Key components of the NBI formula:

  1. Total Wilshire 5000 Market Cap / GDP: Reflects the overall market capitalization in relation to the economic output, providing a measure of the market's size relative to the broader economy.
  2. 24-Month SMA of SPX Profit Margin: Smoothens the profit margin data over a 24-month period, offering a more stable representation of the S&P 500's earnings performance. This component introduces a normalization effect, ensuring that the indicator considers variations in profit margins and their influence on overall market valuations.

Investors can leverage this sophisticated metric to make informed decisions, considering not only the market's overall size relative to the economy but also the normalized influence of profit margins on valuation dynamics.

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