What’s a Buffett-Munger Bargain?

Warren Buffett’s Market Indicator Reaches New 10-year High

The U.S. stock market remained significantly overvalued June 29, with Warren Buffett (Trades, Portfolio)’s market indicator reaching 133.2%. The high market valuation is partially driven by the deceleration of U.S. gross domestic product during the first quarter.

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO measures the total market valuation as the ratio of the Wilshire 5000 index to U.S. GDP. As of July 29, the index reached $25.35 trillion, approximately 133.2% of the last-reported GDP of $19.03 trillion. Based on the current market valuation, the U.S. stock market is expected to return -1.1% per year including dividends.

The U.S. Bureau of Economic Analysis (BEA) reported a 1.4% annual GDP increase during the first quarter according to its “third (and final)” estimate. Although the first-quarter estimates increased 0.2% from May’s “second” estimate, the final first-quarter GDP growth estimate underperformed prior-quarter GDP growth by about 0.7%, driven by lower private inventory investments, personal consumption expenditures (PCE) and state and local government spending according to the BEA report.

Second-quarter GDP expectations

According to Reuters, the 1.4% GDP increase from the first quarter was the “slowest growth rate since the second quarter of last year.” Reuters also mentioned that although second-quarter GDP growth values signal a potential rebound, “disappointing data on retail sales, manufacturing production and inflation” lowered the Federal Reserve Bank of Atlanta’s second-quarter GDP nowcast from its early June estimate of 4% to the current value of 2.6%.

University of St. Thomas, Houston analyst H. Shirvani expects the 1.4% growth rate will continue over the next few quarters as a 3% growth rate stipulated by the Trump administration is “highly unrealistic, given the lack of any significant progress” in President Trump’s tax reform and infrastructure construction policies. Shirvani warns that for a 3% GDP growth rate to occur, the U.S. capital formation must be “accelerated to boost productivity growth.” Unfortunately, several factors, including tighter monetary policies and higher financial market volatility, impede the national economy’s potential to achieve expected growth targets.

Other market indicators suggest a possible correction

Since May, Robert Shiller’s cyclically-adjusted price-earnings ratio averaged 30, representing a new high since the 2008 financial crisis. The market Shiller P/E ratio is driven by significantly high ratios in the telecom, technology and real estate sectors, which are 29.8, 32.7 and 48.7 as of June 29. Based on the Shiller P/E valuation, the implied annual market return is about -2%.