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James Li
James Li
Articles (776)  | Author's Website |

US Market Starts Summer 2019 Significantly Overvalued

Markets attempt to rebound from May’s troubles, Dow soars over 500 points

June 04, 2019 | About:

On June 4, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator stood at 134.7%. Although it declined approximately 10% from its May 1 level of 144.4% and approximately 5% from its May 24 level of 139.9%, the ratio of total market cap to gross domestic product is still approximately 15% higher than the “significant overvaluation” threshold of 115%.

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Dow attempts to rebound from late May tumble, closes over 500 points higher

The Dow Jones Industrial Average closed at 25,331.43, up 511.65 points from Monday’s close of 24,819.78. Top Berkshire holdings Apple Inc. (NASDAQ:AAPL) and Goldman Sachs Group Inc. (NYSE:GS) led the rally: Apple climbed 3.66% from its previous close of $173.30, while Goldman soared 3.65% from its previous close of $183.19.

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CNBC columnist Fred Imbert listed several contributors to the Dow’s rally, including Federal Reserve Chairman Jerome Powell’s comments that the central bank is “open to easing monetary policy to save the economy.” Comments from China and Mexico also mitigated trade war tensions.

According to Imbert, the Chinese Commerce Ministry said while the “difference and frictions” between the U.S. and China should be dealt with through talks, the negotiations must be based on “mutual respect, equality and mutual benefit.” Likewise, Mexican Foreign Minister Marcelo Ebrard said Mexico still expects to find “common ground” on immigration and trade despite President Donald Trump’s tariff threats.

Market remains significantly overvalued

Despite the Dow’s surge, the Wilshire 5000 full-cap index stood at $28.37 trillion, approximately 134.7% higher than the last-reported U.S. gross domestic product of $21.06 trillion. Based on the current market level, the expected market return over the next eight years is approximately -1.3% per year. According to the predicted and actual returns chart, the expected return ranges from -9.10% in the most-pessimistic case to 3.60% in the most-optimistic case.

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Value screeners continue identifying investing opportunities

As Table 1 illustrates, GuruFocus’ value screens continue to identify investing opportunities regardless of the market valuation level. The Undervalued-Predictable model portfolio and the Most Broadly Held model portfolio have outperformed the benchmark at least six times over the last seven years.

Screener

USA

Asia

Europe

Canada

UK / Ireland

Oceania

Latin America

Africa

India

Graham Net-Net

237

602

262

54

56

13

7

15

52

Undervalued Predictable

56

74

122

6

57

5

47

6

10

Buffett-Munger

38

92

78

4

34

0

27

6

50

Magic Formula

4403

13295

7083

532

2439

573

1099

384

3473

Historical Low PS

43

127

72

0

25

0

30

7

27

Historical Low PB

56

128

85

3

33

3

37

10

23

Peter Lynch P/E

37

67

58

1

30

0

6

2

11

Peter Lynch P/S

122

96

154

9

58

9

56

25

34

Peter Lynch P/B

161

129

181

27

90

9

42

25

53

Peter Lynch P/Ebitda

216

154

250

8

78

10

20

15

44

52-week Lows

1627

3944

2358

157

619

121

445

168

992

Three-year Lows

768

2164

1175

93

321

47

184

88

603

Five-year Lows

543

1483

816

57

225

30

114

72

404

52-week Highs

1517

1383

2383

219

1141

172

478

111

617

Three-year Highs

1177

653

1701

134

930

121

383

62

328

Five-year Highs

1063

512

1576

122

898

115

358

48

303

High Dividend Yield

67

45

150

7

15

12

27

7

6

Table 1

Premium members have access to our value screens, including the All-in-One Screener that allows you to screen using over 500 predefined and user-defined fields.

Disclosure: No positions.

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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


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