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James Li
James Li
Articles (1393)  | Author's Website |

US Markets Remain Significantly Overvalued in September

Markets zoom to new all-time highs

September 01, 2020 | About:

On Tuesday, Warren Buffett (Trades, Portfolio)'s favorite market indicator stood at 186.2%, up 11.1% from the revised value of 175.1% on Aug. 5.

The Buffett Indicator captures the ratio of the Wilshire 5000 full-cap index to U.S. gross domestic product. Although the total market cap level stood at $36.134 trillion, gross domestic product of approximately $19.41 trillion declined at an annual rate of 31.7% according to second estimates from the U.S. Bureau of Economic Analysis.


Markets zoom to new record closes on August rally

The Dow Jones Industrial Average closed at 28,645.66, up 215.61 points from Monday's close of 28,430.05. Meanwhile, the Standard & Poor's 500 index and the Nasdaq Composite Index set new-record closes of 3,526.65 and 11,939.67.


Apple Inc. (NASDAQ:AAPL), the top holding of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), closed at $134.18, up 3.98% from the previous close of $129.04. The stock completed its four-for-one stock split on Monday.


Shares of Zoom Video Communications Inc. (NASDAQ:ZM) zoomed 40.78% higher on the heels of reporting revenues of $663.5 million, up 355% year over year. Markets rallied in August, with the Dow gaining 7.6% and the S&P 500 climbing 7%. CNBC reported that according to Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management, investors are playing "the momentum game" on the back of the economic recovery.

Markets remain significantly overvalued

As the broad indexes set new all-time highs, Buffett's market valuation indicator reached levels not seen for over 20 years. Based on the current market valuation, the stock market is expected to return -3.4% per year over the next eight years, assuming a reversion to the 20-year median market valuation.


According to the predicted and actual returns chart, the expected market return ranges from -0.30% per year to -7.50% per year. The lower bound gives the expected market return assuming a pessimistic case reversion to 70% of the 20-year median market valuation while the upper bound gives the expected market return assuming an optimistic case reversion to 130% of the 20-year median market valuation.

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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