US Market Starts 4th Quarter Significantly Overvalued

Buffett indicator reaches another new high

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Oct 03, 2017
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On Oct. 3, Warren Buffett (Trades, Portfolio)’s market indicator reached 137%, a new 10-year high. Based on this valuation, the U.S. stock market is expected to return -1.4% per year.

Buffett and Shiller market indicators keep increasing

The ratio of the Wilshire 5000 to the U.S. gross domestic product has steadily increased since reaching a 10-year low of 57% in March 2009.



Buffett mentioned in a CNBC interview that the stock valuations are making sense right now as the 10-year Treasury interest rate reached 2.30%.

Warren Buffett: Stock valuations make sense right now from CNBC.

The predicted and actual returns chart illustrates the range of expected returns over the next few years. The chart shows four lines, three of them outlining the expected trends: Red indicates the most optimistic case, blue indicates the expected case, and green indicates the most pessimistic case. The yellow line highlights the actual returns.


While Buffett measures market values using a price-sales (P/S) ratio, Robert Shiller computes a cyclically adjusted price-earnings (P/E) ratio to measure stock market valuations. The Shiller P/E of the S&P 500 reached 31.1, approximately 85% higher than the historical mean of 16.8. Based on Shiller’s market valuation, the U.S. market is expected to return -2.3% per year.


Insider buy-sell ratio and post-tax corporate margin decline

The insider buy-sell ratio has declined since reaching a three-year high in early 2016, suggesting that insiders are becoming bearish about the market. The ratio dropped from 0.52 to 0.34 during August 2017.


Post-tax corporate margins contracted 1% during the past five years, another indicator of a possible market recession in the upcoming years.

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