US Market Rings in the New Year Significantly Overvalued

The U.S. stock market began 2018 significantly overvalued, with several market indicators hitting record highs.

Buffett indicator celebrates the New Year with new 10-year high

Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio) said one key measure of market valuations is the ratio of the Wilshire 5000 to the U.S. gross domestic product. On Jan. 3, the Wilshire 5000 index reached $28.087 trillion, about 144% of the latest GDP of $19.5 trillion. Such market valuation levels have not occurred since the dot-com bubble 19 years ago. Figure 1 shows the historical trends of the Wilshire 5000 and GDP while Figure 2 shows the historical trend of the Buffett indicator.

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• BRK.A 30-Year Financial Data
• The intrinsic value of BRK.A
• Peter Lynch Chart of BRK.A

Figure 1

Figure 2

Shiller PE nearly reaches twice the historical median

Robert Shiller offers an alternative measure of market valuation known as the cyclically-adjusted price-earnings ratio. The Shiller PE considers the ratio of the S&P 500 index price to the inflation-adjusted earnings over the past 10 years. As of Jan. 3, the S&P 500 has a Shiller PE of 32.9, approximately 95.8% higher than the historical mean of 16.8. Based on the current Shiller PE valuation, the expected return of the U.S. market is -3.1%, approximately 1% worse than the predicted return based on the Buffett indicator. Figure 3 shows the historical trend of the Shiller PE.

Figure 3

U.S. market indexes hit record highs

CNBC's Fred Imbert said the three U.S. market indexes set record intraday highs. The following CNBC video discusses the “January barometer” phenomenon, which predicts the performance of stocks for the rest of the year based on the first few trading days.

Although the “January barometer” predicts a good year for stocks, the U.S. stock market has been significantly overvalued for at least the past three years. Two GuruFocus strategies that have outperformed the market in at least six of the past seven years are the most broadly held strategy and the Buffett-Munger strategy. Premium members can view the aggregated portfolio of gurus to determine the most broadly held stocks. Our premium membership provides access to the list of Buffett-Munger companies, which are companies that meet Buffett and Charlie Munger (Trades, Portfolio)’s investment checklist.

Disclosure: I do not have positions in the stocks mentioned.

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