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James Li
James Li
Articles (1103)  | Author's Website |

US Markets Start 2nd Quarter Significantly Overvalued

Dow Jones Industrial Average eclipses 26,200

April 01, 2019 | About:

On Monday, the first trading day of second-quarter 2019, Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 139.2%, approximately 1% below its March 1 reading of 140.3%. Based on this valuation level, the U.S. market is expected to return -1.7% per year over the next eight years.

Dow nears 26,200

The Dow Jones Industrial Average closed at 26,258.42, up 329.74 points from last Friday’s close of 25,928.68 and approximately 108.42 points from the five-month high of 26,150 set on Nov. 8, 2018. Stocks that led gains included Caterpillar Inc. (NYSE:CAT) and Bill Ackman (Trades, Portfolio) target United Technologies Corp. (NYSE:UTX), with the former gaining 3.51% and the latter gaining 3.34%. Buffett bank holdings Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) also traded higher for the day.


CNBC columnist Fred Imbert listed several reasons for the market boost, including strong manufacturing data from the U.S. and China. The Institute for Supply Management said in a press release that the purchasing manager’s index (PMI) for March increased from the February reading of 54.2% to 55.3%, representing the 31st consecutive month of manufacturing growth. ISM Chairman Timothy Fiore said the increase in PMI reflects “improved growth in employment and to a lesser extent, new orders.”

Imbert also said the China Caixin Manufacturing PMI reached an eight-month high of 50.8, outperforming Refinitiv's estimate of 49.9.

Stock market remains significantly overvalued

The stock market increasing on good economic data news unfortunately increases market valuations. As of Monday, the U.S. stock market remains significantly overvalued, with Buffett’s market indicator reaching 139.20% and the S&P 500 Shiller price-earnings ratio reaching 30.4. Figure 1 illustrates the “predicted and actual returns” chart based on the Buffett indicator.


Figure 1

As Figure 1 illustrates, the expected market return per year can range from -9.50% in the most pessimistic case to 3.10% in the most optimistic case.

Model portfolios continue outperforming the benchmark

Even though the markets remain significantly overvalued, several of our model portfolios continue outperforming the benchmark, including the Most Broadly Held portfolio, the Undervalued-Predictable portfolio and the Buffett-Munger portfolio. Premium members have access to our most-popular value screens, including the All-in-One Screener.

Disclosure: No positions.

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About the author:

James Li
I am an editorial 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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