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US Markets Remain Significantly Overvalued Despite Late-Summer Cooldown

On Friday, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)'s favorite market indicator stood at 143.8%, approximately 4.7% below its all-time high of 148.5%.

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Dow tumbles from Monday's close on Fed uncertainty and renewed trade war threat

The Dow Jones Industrial Average traded at an intraday low of 26,269.66, down 313.76 points from Thursday's close of 26,583.42 and 951.69 points from Monday's close of 27,221.35, the highest close for the week. Top Berkshire holding Apple Inc. (NASDAQ:AAPL) traded at an intraday low of $201.69, down 3.23% from the previous close.

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The markets started tumbling on Wednesday on Federal Reserve Chairman Jerome Powell's comments that the 0.25% rate cut was just a "midcycle adjustment," suggesting that further rate cuts are not certain. Although the markets recovered Thursday morning on the heels of weak purchasing managers' index numbers from IHS Markit Ltd. (NYSE:INFO), increasing hopes of a second Fed rate cut, the U.S. stock indexes turned negative on President Trump's tweets regarding a 10% tariff on $300 billion worth of Chinese goods beginning Sept. 1, the Sunday before Labor Day.

Stock market remains significantly overvalued

Despite the summer market cooldown, the ratio of total market cap to gross domestic product remains above the significant threshold of 115%. Figure 1 reports the current value of the Buffett indicator.

Figure 1

According to Figure 1, the current value of the Buffett indicator is 143.8%. Note that this value is not the expected value of the Buffett indicator over the next eight years.

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Figure 2

The predicted and actual returns chart on Figure 2 illustrates several scenarios regarding the expected value of the Buffett indicator over the next eight years. The expected case assumes an average Buffett indicator value of 80%. Based on the current valuation level of 143.8%, the expected market return per year is -2% assuming the indicator averages 80% during the eight-year period.

We also compute the expected market return per year assuming the indicator averages 120%, the optimistic case, and 40%, the pessimistic case. Based on the current valuation level, the expected market return per year ranges from -9.70% to 2.80%.

Opportunities still exist

GuruFocus' value screeners continue identifying investing opportunities regardless of the market valuation levels. Two investing strategies that have performed well over the past 10 years are the undervalued predictable strategy and the Buffett-Munger strategy. Table 1 lists the number of stocks making these two screeners across our subscription regions.

Screener

USA

Asia

Europe

Canada

UK/Ireland

Oceania

Latin America

Africa

India

Undervalued Predictable

49

73

156

9

72

5

58

7

10

Buffett-Munger

30

109

96

3

42

0

28

5

38



Table 1

Disclosure: No positions.

Read more here:

  • Matthews China Fund's Top 5 Buys of the 2nd Quarter
  • David Nadel's Top 5 Buys of the 2nd Quarter
  • Warren Buffett's Apple Rises on Strong 2nd-Quarter Revenue Growth



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This article first appeared on GuruFocus.