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James Li
James Li
Articles (387)  | Author's Website |

US Stock Market Remains Significantly Overvalued Despite Market Slump

High long-term yields ignite fears of recession

February 05, 2018 | About:

On Feb. 5, Warren Buffett (Trades, Portfolio)’s market indicator reached 143.8%. Although the Dow Jones Industrial Average declined more than 1,800 points over the past two trading days, the U.S. stock market still remains significantly overvalued.

Dow drops 1,800 points over a two-day period primarily due to increasing bond yields

The Dow tumbled 1,175.21 points on Monday following continued “trepidation about rising interest rates,” according to CNBC. On Feb. 2, the Dow dropped 650 points following a strong jobs report that increased the 10-year Treasury constant maturity rate to a four-year high of 2.84%.

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As of February 2018, the spread between the 10-year yield and the one-year yield is 0.89%. This spread has declined since reaching an all-time high of 3.4% in January 2010, suggesting a potential market correction.

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Buffett indicator still above 140%

Despite the market slump, the Buffett indicator is still above 140%, indicating significant overvaluation. The U.S. market is expected to return -2.1% per year based on this market valuation level.

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According to the predicted and actual returns chart, the expected return of the stock market can range between -9.8% for the pessimistic case and 2.7% for the optimistic case.

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See also

Robert Shiller’s market valuation also implies an expected market return of less than -2%.

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As the market remains significantly overvalued, good strategies include the most broadly held portfolio and the Buffett-Munger portfolio. Both of the above model portfolios have outperformed the benchmark in at least seven of the past eight years.

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


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