On June 6, Warren Buffett (Trades, Portfolio)’s market indicator reached 143.6%, approximately 5% lower than its all-time high of 148.5%. Additionally, the Dow Jones Industrial Average eclipsed 25,000 for the second time since May 21.
Buffett indicator closing in on all-time high
The Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO once said the ratio of the Wilshire 5000 to the U.S. gross domestic product is “probably the best single measure” of where market valuations stand at any given moment. The total market index stands at $28,655.5 billion, which is approximately 1.436 times greater than the last-reported GDP of $19,956.8 billion. Based on this market level, the U.S. stock market is expected to return -2.10% per year over the next eight years. Figure 1 shows the historical trends of the Wilshire 5000 and the U.S. GDP, while Figure 2 shows the historical trend of the Buffett indicator.
Figure 1
Figure 2
As discussed in a previous article, the predicted market return consists of three parts: the U.S. market dividend yield, the eight-year GDP growth rate and the “reversion to the mean” investment return. Figure 3 illustrates the predicted market return if the Buffett indicator averages 120%, 80% or 40% over the upcoming eight years.
Figure 3
Dow Jones exceeds 25,000 for the second time since May 21
CNBC columnists Fred Imbert and Alexandra Gibbs said the Dow rose approximately 230 points from its previous close of 24,799.98, with Boeing Co. (BA, Financial), JPMorgan Chase & Co. (JPM, Financial) and Goldman Sachs Group Inc. (GS, Financial) contributing most to the gains. Higher interest rates sparked a rally across banks and asset management companies, including Bank of America Corp. (BAC, Financial) and Morgan Stanley (MS, Financial).
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Buffett also shared four key investing criteria for finding good companies when investing in a significantly overvalued market: predictable revenue and earnings, expanding profit margins, no meaningful debt and available at attractive prices. As the “Oracle of Omaha” once said in a shareholder letter, he prefers to buy a “wonderful company at a fair price" over "a fair company at a wonderful price.” GuruFocus offers at least two value screeners utilizing Buffett’s strategy: the undervalued predictable screener and the Buffett-Munger screener.
Disclosure: No positions.
