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James Li
James Li
Articles (1282)  | Author's Website |

US Market Kicks Off February Significantly Overvalued

Market valuations remain near all-time highs even as China coronavirus spreads

The U.S. stock market kicked off February significantly overvalued even though the coronavirus outbreak in China continued giving sour investor sentiment ahead of Valentine’s Day.

On Monday, the first trading day of February and the day after the Super Bowl, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 155.1%, up approximately 0.4% from the Jan. 13 reading of 154.7% and approximately 6.6% higher than the all-time high of 148.5% set in March 2020. Based on this market level, the implied market return per year over the next eight years is -3% assuming a reversion to the mean level of 80% and 2.6% assuming a reversion to an optimistic level of 120%.


Dow closes below intraday highs as coronavirus fears accelerate

The Dow Jones Industrial Average opened the day with a touchdown, up over 370 points from Friday’s close of 28,256.03 on the back of strong manufacturing activity during January. Sports giant Nike Inc. (NYSE:NKE) quarterbacked the Dow’s gain during the morning, closing up 3.13% for the day.


Despite the major gain at market open, the Dow gave up approximately half of the gain on increased coronavirus fears. Cruise operator Carnival Corp. (NYSE:CCL) sank 1.66% on news that one of its guests tested positive for coronavirus six days after disembarking according to CNBC. CNBC also added that the number of casualties from the coronavirus reached 361 on Sunday, exceeding the 349 casualties from the SARS outbreak from 2002 and 2003.


Buffett indicator still near all-time high

Despite the coronavirus fears, the Buffett indicator, which captures the ratio of the Wilshire 5000 full-cap index to total gross domestic product, stood at 155.1%. The ratio is approximately 40% higher than the significant overvaluation threshold of 115%.


Several of Berkshire’s top holdings, which include Apple Inc. (NASDAQ:AAPL) and Bank of America Corp. (NYSE:BAC), are trading near 10-year highs. Apple’s valuation ranks 1 out of 10 on several signs of overvaluation, which include price-book and price-sales ratios near 10-year highs and underperforming over 88% of global competitors.


Most gurus have not released their fourth-quarter 2019 portfolios as the deadline is 45 days after the quarter ends. Apple still has high guru ownership despite its high valuation: According to the Aggregated Portfolio of Gurus, a Premium feature, 37 gurus own shares of the Cupertino, California-based tech giant. Such gurus include Ken Fisher (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Bill Nygren (Trades, Portfolio).


The Aggregated Portfolio of Gurus tracks the most-broadly held guru stocks, a model strategy that has outperformed the Standard & Poor’s 500 index benchmark in over the past three years. Other strategies that have outperformed the benchmark include the Undervalued Predictable strategy and the Buffett-Munger strategy.

Disclosure: No positions.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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Rating: 5.0/5 (2 votes)



Martin Weinstein
Martin Weinstein - 6 months ago    Report SPAM

Hi! Very interesting Articule.

I wanted to ask why does the FRED (Fed) indicator which is at 178% diverge from the Buffett indicator (155%) when both meassure the relation between Wilshire 5000 total market vs US GDP.


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