With Dow approaching 9000, we would like to give an update on where we are with the market valuations, and what we can expect from the general market for the next decade.
We have been using the ratio of total market cap to GNP as the indicator of the market valuation. Compared the current value of this ratio with its historical range we can get an idea on where we stand with market valuations and what kind of return the stock market is likely to deliver.
As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.” We have written about this in Oct. 2008 and Feb. 2009. We also develop a page which shows daily broad market valuations.
As shown in the page the daily broad market valuations, the total market cap is about 70% of the GDP, and the market is likely to deliver somewhere around 8.9% a year for the coming years.
The return of 8.9% a year is a big reduction from around 13% a year the market was positioned in March, thanks to the recovery of the stock market from its March lows. Dow Jones has climbed by more than 34% since, a lot of low quality stocks have more than doubled.
Where will the market go? It is anyone’s guess. But with the market recovery, the return we can expect is likely to shrink. John Hussman, who has successfully avoided the market collapse in 2008, thinks “the Market Climate for stocks was characterized by modest overvaluation (though not significant overvaluation).” He thinks that the market is likely to return 7-8% a year. This agrees with what we found out with the ratio of total market cap to GDP.
Link: daily broad market valuations.
P. S. In our back testing of 1998-2008, we found that highly predictable companies outperformed general market by about 9% a year, undervalued predictable companies beat the market by more than 16% a year. If you are an optimist, you may want to check our list of undervalued predictable companies and Buffett-Munger Screener. These features are for Premium Members only. If you are not a Premium Member, we invite you for a 7-day Free Trial.
We have been using the ratio of total market cap to GNP as the indicator of the market valuation. Compared the current value of this ratio with its historical range we can get an idea on where we stand with market valuations and what kind of return the stock market is likely to deliver.
As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.” We have written about this in Oct. 2008 and Feb. 2009. We also develop a page which shows daily broad market valuations.
As shown in the page the daily broad market valuations, the total market cap is about 70% of the GDP, and the market is likely to deliver somewhere around 8.9% a year for the coming years.
The return of 8.9% a year is a big reduction from around 13% a year the market was positioned in March, thanks to the recovery of the stock market from its March lows. Dow Jones has climbed by more than 34% since, a lot of low quality stocks have more than doubled.
Where will the market go? It is anyone’s guess. But with the market recovery, the return we can expect is likely to shrink. John Hussman, who has successfully avoided the market collapse in 2008, thinks “the Market Climate for stocks was characterized by modest overvaluation (though not significant overvaluation).” He thinks that the market is likely to return 7-8% a year. This agrees with what we found out with the ratio of total market cap to GDP.
Link: daily broad market valuations.
P. S. In our back testing of 1998-2008, we found that highly predictable companies outperformed general market by about 9% a year, undervalued predictable companies beat the market by more than 16% a year. If you are an optimist, you may want to check our list of undervalued predictable companies and Buffett-Munger Screener. These features are for Premium Members only. If you are not a Premium Member, we invite you for a 7-day Free Trial.
