Are stocks currently overvalued and on the verge of a correction? To shed light on that quandary, let’s consult a time-proven tool favored by the Oracle of Omaha himself, Warren Buffett.

By the latest estimate, Buffett is worth $138.6 billion, so he must know a thing or two. The tool is called the “Buffett Indicator,” which I’ll get to in a minute.

We’re living through a turbulent episode in American politics, with a looming rematch in November between President Joe Biden and his predecessor Donald Trump.

Biden and Trump offer starkly different visions for America; the stakes for our democracy and the rest of the world are enormous. Partisan divisions are the worst they’ve been in this country since the run-up to the Civil War.

And yet, the financial markets continue to hit all-time highs, with the S&P 500 index up 10.2% in the just-concluded first quarter of 2024.

In Washington, what matters is power. On Wall Street, what matters are outcomes. Gordon Gekko, in the 1987 movie Wall Street, summed it up: “It’s all about bucks, kid. The rest is conversation.”

Inflation is falling (albeit with occasional blips higher); the global economy is growing; the Federal Reserve has signaled it will cut interest rates by mid-year; and corporate profits are rebounding. Accordingly, the U.S. stock market rally has shown remarkable momentum.

On Monday, U.S. stocks took a breather and closed mostly lower. In pre-market futures trading Tuesday, the main indices were continuing their slide.

Many market observers are starting to get skittish about valuations. As of this writing on Tuesday, the forward 12-month price-to-earnings (P/E) ratio of the S&P 500 hovered at 20.9. That’s down from 21.5 the previous quarter and 23.9 the previous year. Historically, the typical range is 20.5 to 28.7 (data from FactSet).

A Bubble in Search of a Pin?

Are we in the midst of an asset bubble that’s about to pop? Let’s turn to the so-called Buffett Indicator for clues.

This indicator, devised by Warren Buffett, is the market cap to gross domestic product (GDP) ratio. It’s a measure of the total value of all publicly traded stock in a country, divided by that country’s GDP.

In a Fortune magazine interview in 2001, Buffett described his indicator as “the best single measure of where valuations stand at any given moment.”

Think of the Buffett Indicator as a broad way to assess whether a country’s stock market is overvalued or undervalued. Brace yourself for a possible wave of selling, because the indicator for the U.S. has reached a disturbingly high level.

The ratio of market capitalizations, as measured by the broad Wilshire 5000 index to U.S. GDP, has surged to a two-year high of about 186% (see the following chart, with data as of market close March 28).

So how should you invest now? Let’s turn again to Warren Buffett. I generally follow the value investing school of thought and Buffett takes value investing to a deep level. As he puts it: “In the short term the market is a popularity contest; in the long term it is a weighing machine.”

The market appears to be frothy right now, but you should welcome a temporary pullback. Buffett also said: “Widespread fear is your friend as an investor because it serves up bargain purchases.” Never panic during a sell-off. Not only will the market eventually bounce back, but it will do so a lot sooner than you might think.

Buffett doesn’t necessarily wait for the market to eventually reward the merits of underappreciated stocks; he chooses stocks according to their potential as companies. He looks for strong balance sheets, good products that people need, market domination, and high-quality management. He emphasizes long-term ownership of a company, not just the chance for capital appreciation based on temporary market dynamics.

The upshot: Despite currently volatile conditions, stick to your long-term goals. Pursue wealth-building with mental discipline, one step at a time.

One proven vehicle for building wealth over the long haul is to invest in utilities stocks. Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

Do you seek peace of mind in today’s uncertain investment climate? As you position your portfolio for the rest of 2024, turn to utilities stocks. These stable, high-dividend stalwarts provide shelter from the storm.

Utilities stocks offer growth, income and asset protection. That’s an unbeatable combination. As the second quarter gets underway, many utilities stocks also trade at bargain valuations.

But you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.