^GSPC Today, January 19: Buffett Indicator 222% Flags Crash Risk
A potential stock market crash is back in focus today, January 19, as the Buffett indicator sits near 222% while the S&P 500 (^GSPC) pushes to fresh highs. That extreme reading is a classic S&P 500 warning on valuations. We think Canadian investors should prepare, not panic. Smart market downturn preparation means staying invested, adding on dips, and protecting withdrawals. Below, we explain what 222% signals, why momentum still matters, and how to build a resilient plan for RRSPs and TFSAs.
Buffett indicator at 222%: signal, not a stopwatch
The Buffett indicator compares total market value to GDP. Near 222%, it implies stretched valuations and lower long-term returns. It does not predict a date for a stock market crash, but it raises the odds of bigger drawdowns. We use it as a risk gauge, pairing it with earnings growth, rates, and margins to judge whether pricing leaves a small margin of safety.
Valuations are rich, yet profits and cash flows remain solid. Rate paths and productivity will drive the next leg. For Canadians, currency can cushion or amplify moves. A stronger U.S. dollar can soften a slide in CAD terms. Read more context in this overview from The Motley Fool.
Momentum is firm, but pay respect to drawdowns
The index trend is up and breadth has improved, which limits near-term downside. Still, high valuation plus hot momentum can invite sharp reversals. We treat this as a classic S&P 500 warning: respect the uptrend, but size positions so a sudden 10% swing does not force sales. New buys get staggered entries to reduce regret.
History says routine setbacks run 5% to 10%, while deeper resets can reach 15% to 25%. We plan for both. A stock market crash scenario is rare, but possible when leverage and sentiment are extended. Our base case favors staggered buying on weakness, using limit orders and set rebalancing bands to keep emotions out of decisions.
Preparation without timing the market
Automate buys into RRSPs and TFSAs every payday. Keep a 6 to 12 month cash bucket for spending needs in C$, especially if you are close to retirement. This cushions a stock market crash and keeps you invested. For taxable accounts, set a target asset mix and rebalance on a schedule, not feelings.
The first five retirement years matter most. To reduce damage from a downturn, hold two to three years of withdrawals in cash or short-term GICs. Layer in dividend stocks and low-cost ETFs for income. The Globe and Mail offers practical guidance on this topic here.
What to buy on dips: a simple checklist
Focus on firms with net cash or modest debt, steady free cash flow, and clear pricing power. Prefer recurring revenue, mission-critical products, and wide moats. A stock market crash can turn these leaders into bargains. Demand a valuation edge, such as price-to-free-cash-flow below its five-year average.
Pair a core S&P 500 ETF with Canada exposure and a small tilt to quality or low volatility. This mix can soften shocks while keeping upside. Reinvest dividends. Set buy ranges for staged entries during corrections. This is practical market downturn preparation that avoids guessing tops and bottoms.
Final Thoughts
The Buffett indicator at 222% tells us risk is higher, not that a date-certain stock market crash is coming. We treat it as a caution flag while the S&P 500 trend remains positive. For Canadians, the best plan is steady contributions, cash buffers in C$, and disciplined rebalancing. Retirees can lower sequence-of-returns risk with two to three years of withdrawals in cash or short-term GICs. On weakness, add quality companies and diversified ETFs using staged buys. Keep costs low, taxes in mind, and emotions off the desk. Preparation beats prediction, every time.
FAQs
What is the Buffett indicator and why does 222% matter?
The Buffett indicator divides total stock market value by GDP to gauge valuation. A reading near 222% suggests the market is richly priced, which can mean lower forward returns and fatter drawdowns. It is a risk light, not a timer. We pair it with earnings trends, rates, and margins to guide allocation choices.
Should I sell everything before a potential stock market crash?
We would not. Timing exits and re-entries is hard and often costly. Instead, set a target asset mix, keep a 6 to 12 month cash bucket in C$, and automate contributions. Use rebalancing rules to trim winners and add to laggards. This keeps you invested while managing downside risk.
How can Canadian retirees reduce sequence-of-returns risk?
Hold two to three years of planned withdrawals in cash or short-term GICs, then invest the rest in diversified stock and bond ETFs. Draw from the cash bucket during downturns and refill it after rallies. Coordinate TFSA and RRSP withdrawals to manage taxes and keep your spending plan stable.
What should I buy if the market drops 10% to 20%?
Prioritize quality: strong balance sheets, consistent free cash flow, and pricing power. Add broad ETFs for instant diversification and consider tilts to quality or low volatility. Use staged limit orders and rebalancing bands to guide buys. Aim to improve valuation, not chase perfect bottoms.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
