On August 24th, the Buffett Index (CSI 300 market capitalization/GDP) was 91.37%, further declining from its July high. The CSI 300 Index Equity Risk Premium (ERP), a stock-bond ratio indicator, was 5.44%, a new high since March 23rd and close to the upper limit of its one-year volatility range. However, from a longer-term perspective, it remains at the lower end of its five-year volatility range, suggesting that while the advantage of stocks relative to government bond yields has increased, it has only returned to a neutral level.
-------- Note: 1. The Buffett Index compares total stock market capitalization to GDP to determine whether the stock market is currently overvalued. Generally, 70-100% is considered a normal valuation; below this range is considered undervalued, and above is considered overvalued.
2. The risk premium (ERP) of the CSI 300 Index is mainly compared with the returns of the CSI 300 and the yield of government bonds. Statistics from the past 10 years show that this indicator has a clear inverse relationship with the stock index. Every time the stock market is in the bottom area, the risk premium exceeds 6%. That is, when ERP ≥ 6%, the stock market has investment value, while when ERP ≤ 4%, the stock market is often close to or at a stage high, the investment value is low, and there is even a risk of correction.
