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James Li
James Li
Articles (657)  | Author's Website |

Warren Buffett’s Market Indicator Rises Near All-Time High

Dow Jones surpasses 25,000 milestone for the second time in the past three weeks

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. (NYSE:BRK.A)(NYSE:BRK.B) 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. (NYSE:BA), JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc. (NYSE:GS) contributing most to the gains. Higher interest rates sparked a rally across banks and asset management companies, including Bank of America Corp. (NYSE:BAC) and Morgan Stanley (NYSE:MS).

See also

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.

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

Rating: 5.0/5 (7 votes)



Designsn28 - 7 months ago    Report SPAM

It's a time to act with more caution since the pendulum is in the overvaluation territory. Any thoughts on MNK?

Delphicpop - 7 months ago    Report SPAM
I've been curious about MNK, given its run in early May. Check out this article: [www.fool.com]
Minli98 premium member - 7 months ago

I am confused by Figure 3. Why does the red line (market overvalue) has the highest expected return (2.7%), while the green line has the lowest (-9.8%)?

Pachyderm - 7 months ago    Report SPAM
When did Warren Buffett (Trades, Portfolio) say this ? Reason for asking, is that IF this was sometime ago, it may not be as relevant today given the extent of globalisation that has occurred. Today, many firms listed on US markets earn a significant part of their profits outside the US. Thus just comparing growth of US market cap to growth in US GDP alone may not be so appropriate these days.

James Li
James Li premium member - 7 months ago

@minli98 We probably just artificially selected red to represent the most optimistic case (TMC/GDP = 120%) and green to represent the most pessimistic case (TMC/GDP = 40%).

@Pachyderm The Buffett-Indicator definition page mentions that the ratio of total market cap to gross national product is "probably the best market valuation" according to Buffett. Although GNP captures the size of the U.S. economy, we simply compute the market valuations using GDP. (The page mentions that GDP and GNP differ by less than 1%.)

Bruce Bohannon
Bruce Bohannon premium member - 7 months ago

James, thanks for writing about the Buffett Indicator and providing links to the GF Screeners. Love the insights from BRK and this team here. Patience bordering on Sloth is a difficult practice for me. Reviewing this Indicator helps tremendously.

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