On Friday, the final day of the third quarter, Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator tumbled to 108.3%, down 8.4% from the Sept. 1 reading of 116.7% and close to a two-year low.
US market ends 3rd quarter down as inflation continues
The Dow Jones Industrial Average tumbled approximately 8.33% during September, the worst monthly performance for the 30-stock index since March 2020, the beginning of the Covid-19 pandemic. The fall included more than a 1% decline on Friday, compared to its previous close of 29,225.61.
U.S. stock market indexes ended the third quarter down as personal consumption expenditure excluding food and energy, the Federal Reserve’s preferred measure of inflation, climbed 0.6% in August, faster than the Dow Jones estimate of 0.5%. Personal consumption expenditures including gas and energy increased 0.3%, compared to a 0.1% decline in July.
According to the Aggregated Statistics Chart, a Premium feature of GuruFocus, the mean one-month total return for the Standard & Poor’s 500 index stocks is -7.54% with a median of -7.38%.
Likewise, the mean three-month total return for the S&P 500 stocks is -2.78% with a median of -3.41%.
Buffett indicator falls near two-year low
Buffett opined 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.” GuruFocus modified the ratio by adding the Federal Reserve assets to the denominator to account for the Fed's market-moving monetary policy decisions.
The Buffett indicator stood at 108.3%, showing that the U.S. stock market is modestly overvalued. Based on this market valuation level, the implied stock market return is 3.9% per year, assuming that market valuations reverse to the 20-year-median value of 93.69%.
The predicted and actual returns chart gives two other scenarios: an optimistic case at reversion to 130% of the 20-year-median and a pessimistic case at reversion to 70% of the 20-year-median. Based on this chart, the implied market return can range between -0.5% and 5.5%.
S&P 500 is now modestly undervalued based on GF Value
GuruFocus’ GF Value measures valuations based on an exclusive method that considers historical price multiples and internal adjustments for growth and past performance. The S&P 500 traded around 3,617.59, showing that the index is modestly undervalued based on Friday’s price-to-GF-Value ratio of 0.86.
