Much has been said about the current market valuation and expected returns. Investors who paid attention to this have been punished badly, as the current market valuation would suggest them avoid stocks. As a matter of fact, the market is indeed positioned for returns in the order of 3% per year for the coming years.
Three percent may sound unacceptable, but everything else is returning even less. Thanks to Fed’s zero interest policy. Where do you put your money? Are you chasing returns? If you think too much, you would be cautious and put your money in cash or hedge your stock positions. Those who pay no attention to long-term market valuations are rewarded greatly, as least for now. Who knows when the music will stop!
The current market momentum may interrupt a 45-year winning streak of Warren Buffett, with which he has beaten the market average in any rolling 5-year period since he took over Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Buffett discussed this in his latest shareholder letter. “We do better in headwinds.” He wrote.
Buffett is not alone. Prem Watsa has lost more than $1 billion to his equity hedges in 2012. John Hussman has largely lost his creditability to a lot of investors for his bearishness. His fund has underperformed the market significantly in the last several years.
“We do better in headwinds.” This is also true for GuruFocus Value Strategies. Our Buffett-Munger model portfolio has been underperforming, too, although it outperformed the market from 2009 through 2011 and the overall outperformance is 22% since 2009. This is frustrating, but we are going to stick to our philosophy of investing in high quality companies at reasonable prices.
Let’s back to our topic if you still want to read. Where are we with market valuations?
GuruFocus hosts three pages about market valuations. The first is the market valuation based on the ratio of total market cap over GDP; the second is the measurement of the U.S. market valuation based on the Shiller P/E. These pages are for U.S market. We have also created a new page for international markets. You can check it out here. All pages are updated at least daily. Monthly data is displayed for international market.
Market valuation based on the ratio of total market cap over GDP
As pointed out by Warren Buffett, the percentage of total market cap (TMC) relative to the U.S. GNP is “probably the best single measure of where valuations stand at any given moment.” You can learn the details on why this is important and how we do the calculation in our Market Valuation page. This page is updated daily.
As of today, the Total Market Index as measured by the Wilshire 5000 index is at $16,258.5 billion, and it is now 104.6% of the U.S. GDP. The stock market will return about 3% a year in the coming years, including dividends. As a comparison, in January 2012, the ratio of total market cap over GDP was 87.4%, it was likely to return 5.7% a year from that level of valuation. The 20% gain since the beginning of 2012 has reduced the future gains by about 2.7% a year.
The historical prediction from this model and the actual market performance is show here:
Three percent may sound unacceptable, but everything else is returning even less. Thanks to Fed’s zero interest policy. Where do you put your money? Are you chasing returns? If you think too much, you would be cautious and put your money in cash or hedge your stock positions. Those who pay no attention to long-term market valuations are rewarded greatly, as least for now. Who knows when the music will stop!
The current market momentum may interrupt a 45-year winning streak of Warren Buffett, with which he has beaten the market average in any rolling 5-year period since he took over Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Buffett discussed this in his latest shareholder letter. “We do better in headwinds.” He wrote.
Buffett is not alone. Prem Watsa has lost more than $1 billion to his equity hedges in 2012. John Hussman has largely lost his creditability to a lot of investors for his bearishness. His fund has underperformed the market significantly in the last several years.
“We do better in headwinds.” This is also true for GuruFocus Value Strategies. Our Buffett-Munger model portfolio has been underperforming, too, although it outperformed the market from 2009 through 2011 and the overall outperformance is 22% since 2009. This is frustrating, but we are going to stick to our philosophy of investing in high quality companies at reasonable prices.
Let’s back to our topic if you still want to read. Where are we with market valuations?
GuruFocus hosts three pages about market valuations. The first is the market valuation based on the ratio of total market cap over GDP; the second is the measurement of the U.S. market valuation based on the Shiller P/E. These pages are for U.S market. We have also created a new page for international markets. You can check it out here. All pages are updated at least daily. Monthly data is displayed for international market.
Market valuation based on the ratio of total market cap over GDP
As pointed out by Warren Buffett, the percentage of total market cap (TMC) relative to the U.S. GNP is “probably the best single measure of where valuations stand at any given moment.” You can learn the details on why this is important and how we do the calculation in our Market Valuation page. This page is updated daily.
As of today, the Total Market Index as measured by the Wilshire 5000 index is at $16,258.5 billion, and it is now 104.6% of the U.S. GDP. The stock market will return about 3% a year in the coming years, including dividends. As a comparison, in January 2012, the ratio of total market cap over GDP was 87.4%, it was likely to return 5.7% a year from that level of valuation. The 20% gain since the beginning of 2012 has reduced the future gains by about 2.7% a year.
The historical prediction from this model and the actual market performance is show here:
