Warren Buffett's Market Indicator Remains Around 140%

On Tuesday, the first trading day following the Labor Day weekend, Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator stood at 140.2%. Based on this market level, the implied market return per year is -1.7%, assuming market valuations return to the mean.

Dow tumbles on new U.S.-China tariffs and weak U.S. manufacturing data

The Dow Jones Industrial Average closed at 26,118.02, down 285.26 points from Friday’s close of 26,403.28. Berkshire's top holding, Apple Inc. (AAPL, Financial), closed at $205.70, down 1.46% from the previous close of $208.74.

On Sunday, the Chinese government increased tariffs between 5% and 10% on U.S. goods like soybeans and crude oil in retaliation to President Trump’s 15% tariffs on certain Chinese exports. Despite this, Chinese Ministry of Commerce Spokesman Geo Feng said Beijing is “under serious negotiations” regarding the removal of Trump’s tariffs to prevent further escalation of the trade war according to a CNBC article dated Monday. CNBC further mentioned that Quincy Krosby, chief financial strategist at Prudential Financial Inc. (PRU, Financial), said the market is “vulnerable” to news regarding the “misery and optimism” related to trade talks.

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Weak U.S. manufacturing data further dampened investor sentiment on Tuesday: The Institute for Supply Management said the U.S. purchasing managers’ index dipped below 50% in August, the first reading that signals a contraction since 2016.

Markets remain significantly overvalued despite starting the month on the wrong foot

Buffett, who turned 89 last Friday, said the ratio between the Wilshire 5000 full-cap price index and gross domestic product is “probably the best single measure of where valuations stand at any given moment.” Tuesday’s total market index level of $29,911.1 billion is 140.2% greater than the last-reported GDP of $21,337.9 billion.

The predicted and actual returns chart highlights the expected market return over the next eight years for three scenarios: the expected case that assumes a reversion to the mean market valuation level of 80%, an optimistic case that assumes a reversion to 1.5 times the mean level and a pessimistic case that assumes a reversion to 0.5 times the mean level. The expected market return is -1.7% for the expected case, -9.50% in the pessimistic case and 3.10% in the optimistic case.

Value screens continue identifying good opportunities

Value screens like the Benjamin Graham Net-Net Screen, the Undervalued Predictable Screen and the Buffett-Munger Screen, some of our most-popular Premium features, continue identifying good investing opportunities. Table 1 lists the value screener record as of Tuesday.

Table 1

Disclosure: No positions.

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