On Monday, the day prior to Election Day, the U.S. stock market remains significantly overvalued based on both the Buffett market indicator and the Shiller price-earnings ratio.
Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)'s favorite market indicator stood at 174.8%, down 2.8% from the Oct. 1 value of 177.6% yet still close to the all-time high of 183.40%. Likewise, the Shiller price-earnings ratio stood at 30.2, approximately 18% higher than the 20-year mean of 25.6.
Dow starts new month with a bang, but still below October high
The Dow Jones Industrial Average closed at 26,925.05, up 423.45 points from last Friday's close of 26,503.57 but down a net 1,912.47 points from a two-month high of 28,837.52 set on Oct. 12. The plunge from the October high comes as investors monitor news regarding September-quarter earnings from major Big Tech companies, rising coronavirus cases around the globe and the 2020 presidential election.
Global cases of the coronavirus topped 46.6 million, with over 9.2 million cases in the U.S. according to Johns Hopkins University statistics.
Buffett indicator still at high level
Buffett pointed out that the ratio of total market cap to gross domestic product is "probably the best single measure of where valuations stand at any given moment." The Wilshire 5000 full cap price index is approximately 1.75 times greater than the last-reported gross domestic product.
Based on the Buffett indicator, the implied market return per year is -2.6% assuming a reversion to the 20-year mean market valuation.
Shiller price-earnings gives alternative market valuation method, yet higher implied return
Yale Professor Robert Shiller offers an alternative market valuation method that considers the price to inflation-adjusted earnings of the Standard & Poor's 500 Index. While Buffett's market indicator implies a -2.6% return per year, Shiller's market indicator implies a 1.7% return per year assuming a reversion to the 20-year mean of 25.6.
Disclosure: No positions.
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