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James Li
James Li
Articles (503)  | Author's Website |

Warren Buffett’s Market Indicator Reaches New 10-year High

US stock market significantly overvalued as GDP growth slows down

June 29, 2017 | About:

The U.S. stock market remained significantly overvalued June 29, with Warren Buffett (Trades, Portfolio)’s market indicator reaching 133.2%. The high market valuation is partially driven by the deceleration of U.S. gross domestic product during the first quarter.

Brief summary of market valuation and GDP report

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO measures the total market valuation as the ratio of the Wilshire 5000 index to U.S. GDP. As of June 29, the index reached $25.35 trillion, approximately 133.2% of the last-reported GDP of $19.03 trillion. Based on the current market valuation, the U.S. stock market is expected to return -1.1% per year including dividends.



The predicted and actual stock market returns chart illustrates the expected annual market return based on three cases: the optimistic case (TMC/GDP = 120%), the expected case (TMC/GDP = 80%) and the pessimistic case (TMC/GDP = 40%). The expected annual market return ranges from -8.9% to 14.9% based on the three possible cases.


The U.S. Bureau of Economic Analysis (BEA) reported a 1.4% annual GDP increase during the first quarter according to its “third (and final)” estimate. Although the first-quarter estimates increased 0.2% from May’s “second” estimate, the final first-quarter GDP growth estimate underperformed prior-quarter GDP growth by about 0.7%, driven by lower private inventory investments, personal consumption expenditures (PCE) and state and local government spending according to the BEA report.

Second-quarter GDP expectations

According to Reuters, the 1.4% GDP increase from the first quarter was the “slowest growth rate since the second quarter of last year.” Reuters also mentioned that although second-quarter GDP growth values signal a potential rebound, “disappointing data on retail sales, manufacturing production and inflation” lowered the Federal Reserve Bank of Atlanta’s second-quarter GDP nowcast from its early June estimate of 4% to the current value of 2.6%.

University of St. Thomas, Houston analyst H. Shirvani expects the 1.4% growth rate will continue over the next few quarters as a 3% growth rate stipulated by the Trump administration is “highly unrealistic, given the lack of any significant progress” in President Trump’s tax reform and infrastructure construction policies. Shirvani warns that for a 3% GDP growth rate to occur, the U.S. capital formation must be “accelerated to boost productivity growth.” Unfortunately, several factors, including tighter monetary policies and higher financial market volatility, impede the national economy’s potential to achieve expected growth targets.

Other market indicators suggest a possible correction

Since May, Robert Shiller’s cyclically-adjusted price-earnings ratio averaged 30, representing a new high since the 2008 financial crisis. The market Shiller P/E ratio is driven by significantly high ratios in the telecom, technology and real estate sectors, which are 29.8, 32.7 and 48.7 as of June 29. Based on the Shiller P/E valuation, the implied annual market return is about -2%.




The corporate profit margin dropped approximately 2.7% from its all-time high of 10% since 2011. Historically, declining corporate profit margins suggest an economic recession may occur in the next two years according to the chart below.

Conclusions and see also

Most investors, including Buffett, have increased their cash holdings over the past six months as the U.S. stock market becomes “severely overvalued.” Berkshire Hathaway has increased its cash holdings and reduced its equity holdings by approximately 15% since fourth-quarter 2013. As of March 29, Buffett’s conglomerate has a cash to equity ratio of approximately 26.8%.



Two model portfolios, the Most Broadly Owned Portfolio and the Buffett-Munger Top 25 portfolio, have outperformed the S&P 500 benchmark in at least six of the past eight years. In other words, these two strategies have a “batting average” of at least 0.75 (please refer to the following article on portfolio statistics for more information on “batting average”). Premium members have access to all value screeners, including those that pertain to the strategies above: the Aggregated Guru Portfolio and the Buffett-Munger Screener.

Disclosure: The author has no positions in the stocks mentioned.

About the author:

James Li
I am an editorial assistant and 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!

Visit James Li's Website

Rating: 5.0/5 (5 votes)



Billrad - 1 year ago    Report SPAM

Good article. interesting to see both shiller CAPE 10 and TMC/GDP hovering so high.

Alexander Pierce
Alexander Pierce premium member - 1 year ago

Don't you mean June 29th?

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