An extended-time favourite stock market valuation indicator of legendary investor Warren Buffett is flashing OVERVALUED.The ‘Buffett Indicator’ because it’s referred to as in Wall Street circles — which takes the Wilshire 5000 Index (seen as the full stock market) and divides it by the annual U.S. GDP — is at its highest degree since earlier than the web bubble crash in 2000. Presently, the ratio of 1.7 is a few 70% above its historic common of 1.Again earlier than the web stock crash, Present Market Valuation factors out the ratio stood at 1.71 — or the market being 71% overvalued.“Normally, this ratio is around 1, meaning that total market cap of all U.S. stocks generally equals annual U.S. GDP. When stocks are considered to be fundamentally overvalued, the ratio increases to 1.3 (so total stock market capitalization is 30% larger than U.S. GDP),” explains Sevens Report Analysis founder Tom Essaye.With Fed liquidity working rampant and fueling new file highs — and the pandemic inflicting U.S. GDP to plunge — it’s no shock the Buffett Indicator is flashing crimson.“What does that mean for us? It means stay long stocks in longer-dated accounts, and make sure you own assets (such as a house, etc.). But it also means this asset inflation cycle better not stop, because as the 1.7 times total market cap to GDP ratio tells us if asset inflation stops, it’s a long, long way down to fundamental support,” cautions Essaye.American flag flies exterior New York Stock Trade. (AP Photograph/Mary Altaffer, File)MoreThat mentioned, it’s wildly unclear if this indicator being overheated means stocks are headed for a short-term crash. Keep in mind, a market might keep overvalued for some time so long as traders imagine it’s nonetheless undervalued.All it might imply is that if one is within the place presently to pare again profitable positions within the portfolio, it wouldn’t be such a foul concept.“Part of the reason why we have paired back modestly some of our positions in equities is because of concerns about valuations here. But I would also say this is a different market than what we saw during the dot com bubble. These are companies that are making earnings and increasing their earnings. Apple is one example of that. We’re not in the same kind of extended valuation scenario we were back in the dot com bubble,” State Street World Buyers Deputy international CIO Lori Heinel advised Yahoo Finance’s The First Commerce.Get extra perception on Buffett’s investing do’s and don’ts right here.Brian Sozzi is an editor-at-large and co-anchor of The First Commerce at Yahoo Finance. Observe Sozzi on Twitter @BrianSozzi and on LinkedIn.Observe Yahoo Finance on Twitter, Fb, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.