U.S. Markets open in 8 hrs 38 mins

US Market Remains Significantly Overvalued Despite Trade War Fears

- By James Li

On Friday, the day U.S. President Trump increased tariffs on over $200 billion of Chinese goods from 10% to 25%, Berkshire Hathaway Inc. (BRK-A)(BRK-B) CEO Warren Buffett (Trades, Portfolio)'s favorite market indicator stood at 141.7%, down approximately 2.7% from its May 1 level of 144.4%.


Dow tumbles further on tariff hike

During the first hour of trading, the Dow Jones Industrial Average traded over 300 points lower than Thursday's close of 25,828.36 on Trump's tariff hike, sending the Dow down close to 700 points from last Friday's close of 26,504.95.

1902293942.png

President Trump said in a tweet that he expects the tariffs to make the U.S. "much stronger" and that China "should not renegotiate deals" at the last minute.

Two major gurus show little trepidation regarding the trade war

CNBC columnist Kate Rooney said on Thursday that Leon Cooperman (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio), two major investors, "are not worried about the ongoing trade war." Rooney cited several reasons, including reasonable valuations, a "friendly" Federal Reserve and low recession risk.

Cooperman, who turned his Omega Advisors hedge fund into a family office at the end of 2018, said the ingredients for a recession are not present: The Federal Reserve remained "dovish" regarding the increase in interest rates while stock valuations remain "reasonable."

Gabelli said that while it is time someone "arm-wrestles" the trade issue, the GAMCO Investors Inc. (GBL) CEO still hopes for a "better and fairer" resolution. Gabelli further said that Trump's threat to increase tariffs and China's ensuing retaliation represents "creative tension."

Stock market remains significantly overvalued yet value screeners still identify good opportunities

The ratio of total market cap to gross domestic product, probably the "best measure" of market valuations according to Warren Buffett, stood at 141.7%, approximately 26.7% higher than the "significant overvaluation" threshold of 115%. Based on this market valuation level, the average market return per year over the next eight years is -1.90%.

1557500262903.png

According to the predicted and actual returns chart, the expected market return per year over the next years ranges from -9.70% in the most pessimistic case to 2.10% in the most optimistic case.

1557500401766.png

Despite the overvalued market, GuruFocus' value screens still show strong investing opportunities as Table 1 illustrates. The value screener counts are as of Thursday.

Screener

USA

Canada

UK

Europe

Asia

Oceania

Latin America

Africa

India

Graham Net-Net

232

58

53

260

659

11

10

14

51

Undervalued Predictable

58

6

56

123

73

8

48

7

12

Buffett-Munger

36

4

32

78

94

2

23

5

52

Peter Lynch PE

30

0

20

40

58

0

6

1

8

Peter Lynch PS

96

6

35

104

80

6

38

22

42

Peter Lynch PB

110

19

60

149

112

6

32

24

61

Lynch p2ebitda

171

8

50

188

119

8

16

17

54

Hist Low PS

34

2

17

53

104

0

16

6

33

Hist Low PB

47

3

29

71

110

2

30

9

29

Magic Formula

4456

541

2321

6976

13274

576

1104

384

3459

52-week Low

1130

127

422

1468

2875

108

379

151

1449

52-week High

1762

235

1196

2828

1413

187

537

108

396

3-year Low

535

79

197

689

1472

43

150

70

825

3-year High

1316

146

943

2015

708

129

431

68

232

5-year Low

382

49

134

466

964

26

92

56

491

5-year High

1187

139

905

1859

561

121

407

53

213

High Div Yield

57

5

10

129

42

16

25

6

6



Table 1

Disclosure: no positions.

Read more here:

Chevron Greenlights Anadarko to Buffett-Backed Occidental

Matthews Asia Small Companies Fund Buys 8 Stocks in 1st Quarter

Lyft Accelerates Ridership Revenue Despite Large 1st-Quarter Net Loss

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here

This article first appeared on GuruFocus.