Warren Buffett’s “best single measure” of stock valuation just made history, but not in a good way
For over two years, Wall Street has been a place for bulls to stomp. Since the curtains opened in 2023, they have been equipped with mature stocks Dow Jones Industrial Average(djindices: ^dji),benchmark S&P 500(snpindex: ^gspc)and is inspired by growth Nasdaq Composite(Nasdaqindex: ^ixix) It exceeds 34%, 58% and 88% respectively.
Investors didn’t have to dig deeper for the catalyst behind this rally. In no particular order, the current bull market owes:
The decline in inflation rate from the four-year high, when the penetration rate was 9.1%.
The excitement of the surrounding stock being divided.
Donald Trump has returned to the White House.
Warren Buffett, CEO Berkshire Hathaway. Image source: The Motley Fool.
But as Wall Street has reminded investors for over a century, when things seem too good, they are usually.
Dow Jones, S&P 500 and Nasdaq Composite all hit fresh highs recently, but one pre-tested valuation tool once approved by billionaire investor Warren Buffett is also found in unknown territory But it’s not a good way to do it.
There is no perfect definition for all sizes when it comes to “value.” What one investor considers to be expensive might be considered a bargain by another investor. Nevertheless, some evidence that investors have relied on for many years, and that stocks, or broader markets, have relied on over the years to determine where, or where, is relatively inexpensive, expensive, or in between. There is a pre-release evaluation tool.
Most investors are probably familiar with it Price and revenue (P/E) ratiosplits the company’s share price into 12 months’ profit per share. This rapid assessment measure tends to work incredible ways in mature businesses, but is not particularly useful during periods of growth inventory and economic turbulence.
According to Wall Street’s far superior value measure Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) “Oracle of Omaha” is now known as the “Buffett Indicator.” The Buffett Indicator divides the total market capitalization of all US traded stocks into gross US product (GDP).
In an interview with luck In 2001, the Berkshire Chief called the market cap to GDP ratio “probably the best single measure of where the rating is always.”
When backtested in 1970, the buffett indicator recorded an average reading of 85%. This means that the total market capitalization of all US stocks is an average multiple of 0.85 times the US GDP over the past 55 years.
However, as you note in the above post on BarChart on social media platform X, the Buffett Indicator is Quite atop That historical norm. Updated for the latest US GDP data (not reflected in Barchart’s posts from December 9th), Buffett’s rating scale for this former rating is 207.04% on January 22nd . It is 140% above the 55-year average.
Previous instances of Buffet Indicator Blast to new highs have brought about important downsides to the Dow, S&P 500, and NASDAQ composites. For example, this assessment tool previously peaked at 195.62% on November 7, 2021. This was just two months before the 2022 Bear Market began, with all three indexes down more than 20%. Prior to this, the Buffett indicator came to the top on February 18, 2020 at 166.56% just before the Covid-19 crash.
In other words, history shows that Wall Street problems continue when Buffett’s precious assessment tools move well beyond the long-term average range. This may be why Omaha Oracle has been a net seller of stocks and $166.2 billion for eight consecutive quarters of Berkshire Hathaway.
Image source: Getty Images.
To be fair, the buffet indicator is far from the only ominous metric or data point at this time. For example, the Syrah P/E ratio of the S&P 500 was the third highest reading 154 years ago, with US M2 money supply declining in 2023 to a level not seen since Great Fear Presion.
Nonetheless, Warren Buffet regularly reminds investors not to bet on America – and history suggests you will listen to that advice.
The reason why Omaha Oracle is a long-term investor is simple. He recognizes the nonlinearity of the economic and investment cycle.
For example, Buffett and his top advisors at Berkshire Hathaway are fully aware that the economy is a normal and inevitable aspect of the economic cycle. But rather than trying to guess when these recessions will occur, he and his team will play numbers games wisely. The average recession has lasted around ten months since the end of World War II, but a typical economic expansion has endured about five years. Betting the US economy to expand is a victory bet and should remain.
The same can be said about what you say to get your money to work on Wall Street.
In June 2023, shortly after the S&P 500 was confirmed to be in a new bull market, researchers from Bespoke Investment Group published the X dataset. The Great Depression began in September 1929.
Spanning the 27 downturn, where the S&P 500 poured at least 20% of its value, the average bear market only lasted 286 calendar days, or about 9.5 months. In comparison, the typical bull market for this wide-running index has been stuck on 1,011 calendar days for 94 years. This is 3.5 times the average bear market.
It is also worth pointing out that if the current bull market for Bespoke’s dataset is estimated now, half of all bull markets (14 out of 27) last longer than the longest bear market. Mid 1970s.
Even if the valuation tool accurately states trouble for the stock market, the numbers game is a strong supporter of long-term investors, like Warren Buffett.
Consider this before purchasing stock at the S&P 500 Index.
Motley Fool Stock Advisor The analyst team has identified what they believe 10 Best Stocks For investors to buy now…and the S&P 500 index was not one of them. The 10 stocks that have made the cut could potentially generate monster returns over the next few years.
When should you think about it? nvidia I created this list on April 15, 2005… If you invested $1,000 at the time of recommendation, There is $829,128! *
Now it’s worth notingStock AdvisorThe average return rate948% – Market-breaking outperformance compared to176%For the S&P 500. Don’t miss our latest Top 10 list.
