US Market Kicks Off 2021 Significantly Overvalued

Stocks start New Year with a bust, but valuations remain high

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Jan 04, 2021
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On Monday, the first trading day of 2021, Berkshire Hathaway Inc. (

BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)'s favorite market indicator stood at 135.1%.

In December 2020, GuruFocus introduced a new Buffett Indicator that captures the ratio of the Wilshire 5000 Full Cap Price Index to the sum of U.S. gross domestic product and the total assets of the Federal Reserve. Based on this market valuation level, the implied market return over the next eight years is -0.4% per year.


Dow starts 2021 with a bust amid lingering coronavirus concerns

The Dow Jones Industrial Average hit an intraday low of 29,881.82, down 724.66 points from the Dec. 31, 2020 close of 30,606.48. Stocks tumbled on the heels of U.S. Covid-19 virus cases topping 20 million on New Year's Day and ahead of the Georgia Senate runoff races on Tuesday.


Even though the Dow plunged over 30% during the first few months of 2020 as the coronavirus pandemic started ravaging global markets, the 30-stock index finished the calendar year at a record close and up 7.3% from 2019.

Icahn Enterprises LP (

IEP, Financial) Board Chairman Carl Icahn (Trades, Portfolio) said in a CNBC "Halftime Report" interview that "wild rallies" in the stock market may eventually "hit a wall and go into a painful correction." The activist investor mentioned that he was "well hedged," though he declined to discuss specific holdings with CNBC. According to GuruFocus top-10 holdings pages, a Premium feature, Icahn's top holdings as of the September 2020 portfolio filing include Icahn Enterprises, Herbalife Nutrition Ltd. (HLF, Financial), Cheniere Energy Inc. (LNG, Financial) and Occidental Petroleum Corp. (OXY, Financial).

Stock market remains highly overvalued based on Buffett's measure

Despite the market selloff, the ratio of total market cap to sum of gross domestic product and total Federal Reserve bank assets stood at 135.1%, suggesting a significantly overvalued stock market. Assuming that valuations reverse to a 20-year mean valuation level, the implied stock market return per year over the next eight years is -0.5%.

GuruFocus also considered two scenarios: an optimistic case at 130% of the 20-year mean valuation level and a pessimistic case at 70% of the 20-year mean valuation level. Based on current market valuations, the implied stock market return per year can range between -4.6% in the pessimistic case and 2.7% in the optimistic case.

GuruFocus Model Portfolios continue outperforming market benchmarks

According to the Model Portfolios page, the Most Broadly Held and Most Weighted model portfolios returned approximately 23% during 2020, outperforming the Standard & Poor's 500 index return of approximately 16.26%. The Most Broadly Held portfolio focuses on the stocks with the highest number of gurus owning shares while the Most Weighted portfolio focuses on the stocks with the highest combined weight. Premium members can view the broadest owned and most-weighted stocks using the Aggregated Portfolio of Gurus.

Disclosure: Author has no positions in the stocks mentioned. The mention of guru portfolio holdings reflect positions as of the September 2020 filing and do not include trades and portfolio hedges made during the fourth quarter of 2020. Unless the guru has at least a 5% stake in a holding, the deadline to report portfolio trades and holdings is 45 days after the quarter ends.

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