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James Li
James Li
Articles (426)  | Author's Website |

Warren Buffett’s Market Indicator Falls Below 140% Ahead of Easter Weekend

US stock market remains significantly overvalued despite market correction

As of market close Thursday, Warren Buffett (Trades, Portfolio)’s market indicator stood at 137.4%, down from March 5’s reading of 140.7%.

Although the Dow Jones industrial average declined 12% from its all-time high set on Jan. 26, the U.S. stock market remains significantly overvalued ahead of Easter weekend.

Dow goes into market correction

The Dow closed around 23848.42 March 28, approximately 2,768 points lower than Jan. 26’s all-time high of 26,616.71. For the first quarter, the Dow took a net loss of approximately 1,000 points.

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From Jan. 26 to Feb. 8, the Dow dropped a net 11% from its all-time high, sending the index into correction territory. Investopedia defines a correction as a reverse movement (usually negative) of at least 10% to adjust for overvaluation. According to CNBC, the top five clunkers for the quarter were General Electric Co. (NYSE:GE), Proctor & Gamble Co. (NYSE:PG), Exxon Mobil Corp. (NYSE:XOM), DowDuPont Inc. (NYSE:DWDP) and Verizon Communications Inc. (NYSE:VZ).

Buffett indicator drops below 140%

The Wilshire 5000 index stood at $27.113 trillion on March 29, approximately 137.4% higher than the latest reported gross domestic product of $19.736 trillion. Based on this market level, the U.S. stock market is expected to return -1.5% per year for the next eight years.

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According to the predicted and actual returns chart, the expected stock market returns for the next eight years range between -9.30% and 3.3%.

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Shiller’s price-earnings valuation remains above average

The Standard & Poor’s 500 index has a cyclically-adjusted price-earnings ratio of 31.2%, approximately 85.7% higher than the historical mean of 16.8. Robert Shiller’s market valuation gives an implied return of -2.4%, approximately 0.9% lower than Buffett’s market valuation.

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GuruFocus provides two strategies that have outperformed the benchmark in at least six of the past seven years: the most broadly held strategy and the Buffett-Munger strategy. The latter implements Berkshire Hathaway Inc.’s (NYSE:BRK.A)(NYSE:BRK.B) four-criterion approach to investing.

Disclosure: No positions.

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!

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