On “Super Tuesday,” a day where people vote in primary elections across the U.S., Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator stood at 138.6%, down 16.5% from the Feb. 3 reading of 155.1%.
Dow gives up major chunk of Monday’s gain as global governments fail to list specific actions to curb coronavirus
The Dow Jones Industrial Average closed at 25,917.41, down 785.91 points from Monday’s close of 26,703.32. Several of Berkshire’s major bank holdings, including Bank of America Corp. (BAC, Financial) and JPMorgan Chase & Co. (JPM, Financial), tumbled 5.52% and 3.75% as the 10-year Treasury yield hit a record low of 0.906%, below 1% for the first time in history.
Federal Reserve Chairman Jerome Powell made an emergency interest rate cut of 0.50%, saying that the magnitude of the coronavirus outbreak’s impact to the U.S. economy remains “highly uncertain” and that easing the stance of monetary policy could “provide support to the economy.” Despite this, Powell said that the central bank is not planning to stimulate the economy with other measures, which include asset purchases or quantitative easing.
Stocks fell earlier during the day when the G-7 countries pledged support to curb an economic slowdown, but did not list specific actions.
Buffett indicator falls from record high
As the market indexes sink from the record highs posted around mid-February, so did the ratio of the total market cap index to the gross domestic product. The ratio, which Buffett says is “probably the best single measure of where valuations stand at any given moment,” dropped below 140% and approximately 10% from the March 2000 level of 148.5%.
Based on the current valuation level, the market is expected to return approximately -1.6% per year over the next eight years, assuming a reversion to the mean level where the total market cap is 80% of the gross domestic product. On the other hand, if the Buffett indicator reverts to an optimistic level of 120%, the expected return is approximately 3.3% per year.
To complete our scenario analysis, we also include in the “predicted and actual returns chart” a pessimistic case: should the Buffett indicator revert to just 40%, the expected return is approximately -9.30% per year.
Shiller price-earnings ratio gives a second perspective on market valuations
Yale Professor Robert Shiller offers an alternative market valuation indicator that considers the cyclically-adjusted price-earnings ratio of the Standard & Poor’s 500 Index.
As of today, the Shiller price-earnings ratio of the S&P 500 is around 29.6, approximately 74.1% higher than the mean ratio of 17. Based on the Shiller market valuation, the implied market return is approximately -1.6% per year, consistent with the implied return based on Buffett’s market indicator.
Our model portfolios continue to outperform the benchmarks
According to the model portfolios page, each of the Most Broadly Held, Buffett-Munger and Undervalued-Predictable strategies have returned over 240% since the respective inception date. Premium members can view the value screens for each of the respective strategies: the Aggregated Portfolio, the Buffett-Munger Screener and the Undervalued-Predictable Screener.
Disclosure: No positions.
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