Warren Buffett
Photographer: Paul Morigi / Getty Images
Photographer: Paul Morigi / Getty Images
With U.S. equities hitting record highs again this week, one of Warren Buffett’s best-known phrases comes to mind: investors should be “afraid when others are greedy.”
Any Buffett disciple who checks the market valuation metric preferred by the billionaire investor these days may be eager to scream in terror.
The “Buffett Indicator” is a simple ratio: the total market capitalization of U.S. stocks divided by the total dollar value of the nation’s gross domestic product. It was first surpassed above its previous high point of the point-like era in 2019. Still, it has been on an upward trend for decades and if there is a mantra to investors who still love it. more than Buffett’s, “the trend is your friend.”
However, in recent weeks, even this long-term trend does not justify the foamy appearance of the metric. With us market capitalization more than double the level of GDP estimated for the current quarter, the ratio has risen to the highest reading above its long-term trend, according to a blog analysis Current market valuation, suggesting a “heavily overvalued” situation.
Source: CurrentMarketValuation.com
Of course, with the Federal Reserve keeping rates close to zero and buying bonds for the foreseeable future, and a lot of planned savings and fiscal stimulus to trigger box office GDP growth and corporate revenue, it’s fair wondering if this is another of the many false alarms that have sounded over the last decade.
“It highlights the remarkable mania we are witnessing in the U.S. equity market,” said Michael O’Rourke, JonesTrading’s chief market strategist. “Even if these (Fed) policies were expected to be permanent, which they shouldn’t be, it still wouldn’t justify paying double the 25-year average of the shares.”
This detachment of the Buffett indicator from its long-term trend is joined by an assortment of other valuation metrics that have surpassed their previous records in the pandemic-induced bearish market rebound last year, if not years before. Price-gains, selling price, and tangible book-price value are among the metrics that are far above the levels of the point-like era that many investors assumed to peak once in a lifetime.
Growing valuations are famous tools for synchronizing the top positions in the market. In fact, all tools are. For now, many investors are confident that the recovery from the pandemic will boost some of the denominators in ratios like these, so they don’t let valuations scare them. The S&P 500 gained 1.2% during the week to close on a record amid a surge in vaccine distributions and progress on a new fiscal stimulus package. Energy, the sector with the best performance this year, led the way, adding 4.3%.
Meanwhile, the ten-year Treasury yield reached 1.20% on Friday, the highest since the fall caused by the pandemic last year. It is likely that interest rates are not yet approaching a level that would undermine the stock case, given that the S&P 500’s profitability return is 3.1%. Speaking to the New York Economic Club this week, Fed Chairman Jerome Powell stressed that the central bank’s stimulating policies will not be re-branded any time soon.
“When compared to fixed-income markets and the rates at which they are located, stock performance remains positive,” he said. Anu Gaggar, senior investment analyst at Commonwealth Financial Network. “And now, with the Fed keeping rates at these low levels, that just gives comfort to the market.”