The U.S. stock market remains significantly overvalued on Dec. 3, the Monday following President Donald Trump’s agreement to suspend additional tariffs on Chinese goods as part of a 90-day trade war ceasefire.
Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator rose from its Nov. 23 reading of 131.7% to 137%. Based on current market levels, the expected market return over the next eight years is -1.50% per year.
Dow pares early gains on 90-day trade war ceasefire with China
According to CNBC correspondent Yen Nee Lee, Trump and Chinese President Xi Jinping agreed to “withhold further tariffs on each other’s countries” for 90 days. The Dow Jones industrial average traded near an intraday high of 25,960.63 during the first hour of trading, led by gains of at least 2% in Caterpillar Inc. (CAT, Financial) and Boeing Co. (BA, Financial). Despite the 442-point spark, the Dow pared gains as experts question the long-term probability of a trade deal between the two countries.
Buffett indicator rises to 137%
Buffett said the ratio of total market cap to gross domestic product is “probably the best single measure of where market valuations stand” at a given moment in time. As of Monday, the Wilshire 5000 full-cap price index is 1.37 times the latest reported gross domestic product, higher than the “significant overvaluation” threshold of 1.15 times.
According to the predefined and actual returns chart, the expected market return ranges from -9.20% per year to 3.40% per year. The -9.20% return assumes an expected valuation level of 40% while the 3.40% return assumes an expected valuation level of 120%.
As of Nov. 29, the two-year Treasury yield is 2.81%, approximately 0.22% lower than the 10-year Treasury yield.
Disclosure: No positions.
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