Analysis: Buffett’s favorite market indicator is flashing red | CNN Business (2024)

Analysis: Buffett’s favorite market indicator is flashing red | CNN Business (1)

A key market indicator created by Warren Buffett is flashing warning signs.

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The “Buffett Indicator” is flashing red.

In 2001, Warren Buffett came up with what he called in Fortune Magazine “probably the best single measure of where [stock] valuations stand at any given moment.”

Today that barometer has soared to a two-year high, signaling that a market retreat could be coming.

What’s happening: Widely known as the “Buffett Indicator,” it measures the size of the US stock market against the size of the economy by taking the total value of all publicly traded companies (measured using the Wilshire 5000 index) and dividing that by the last quarterly estimate for gross domestic product.

The resulting ratio is supposed to tell us how fairly priced stocks are by providing a simple gauge of whether the market is overvalued or undervalued relative to economic output. If the stock market is growing a lot faster than the economy, that could be a sign of a bubble.

Buffett’s Berkshire Hathaway says that a reading of 100% is fair, if it’s closer to 70% stocks are at a bargain price, and if it’s anywhere near the 200% mark, investors are “playing with fire.”

The indicator is currently sitting near a two-year high, at nearly 190%.

The last time the indicator was this high was in 2022, when it hit 211% and the S&P 500 dropped by 19% over the next year.

Bubble territory: Markets have surged higher this year as investor enthusiasm over artificial intelligence stocks have sent chipmakers like Nvidia to all-time highs.

Wall Street is also betting that there will be three interest rate cuts by the Federal Reserve this year, and investors have been preemptively celebrating.

But some analysts are ringing the alarm. They’re worried that AI fervor is misguided. Plus, two Fed officials have forecast no interest rate cuts at all this year.

“My impression is that investors are presently enjoying the double-top of the most extreme speculative bubble in US financial history,” legendary investor John Hussman wrote in a recent note. Hussman predicted the 2000 and 2008 market crashes.

Former Treasury Secretary Larry Summers also fretted over markets last week. “I certainly think we’re at least at the foothills of bubbles,” he said on Bloomberg.

Louis Navellier of Navellier & Associates thinks US markets are in a melt-up that’s being widely ignored by investors. “The market continues to march relentlessly higher and no one is willing to call a top,” he said in a note.

The S&P 500 has surged more than 10% since January, and last week it surpassed Goldman Sachs’ year-end target of 5,200. Analysts at the bank now say there’s a scenario where it could rise an additional 15% to 6,000 by the end of the year.

“As always, there are a lot fewer questions about why the market is up than there are when it trades down,” said Navellier.

Yes, but: The so-called Buffett Indicator is not without flaw. It ignores how much money companies make abroad and doesn’t consider how interest rates might change a company’s valuation. Buffett himself has conceded that the very simple metric has its limitations.

And while markets are frothy, they’re not exactly bubbling.

“This is not hype,” JPMorgan Chase CEO Jamie Dimon told CNBC last month about a potential AI bubble. “When we had the internet bubble the first time around… that was hype. This is not hype. It’s real,” he said. “People are deploying [AI] at different speeds, but it will handle a tremendous amount of stuff.”

The froth appears to be settling — about 23% of S&P 500 companies made a new 52-week high last week, and the equal-weighted S&P 500 is up by nearly 25% since its October 2023 low. That makes this market more “believa-bull,” quipped Kevin Gordon, senior investment strategist at Charles Schwab.

But, he told CNN, “we continue to think the market is vulnerable to a looming negative catalyst — particularly on the earnings front — given both attitudinal and behavioral sentiment metrics are in extreme optimism territory.”

The last trading day of the quarter falls on Thursday, and earnings reports begin in early April.

Visa and Mastercard agree to $30 billion settlement that will lower merchant fees

Two of the world’s largest credit card networks, Visa and Mastercard, as well as the banks that issue cards with them, have agreed to settle a decades-long antitrust case brought upon by merchants, reports my colleague Elisabeth Buchwald.

The settlement is set to lower swipe fees merchants pay when customers make purchases using their Visa or Mastercard by $30 billion over five years, according to a press release announcing the settlement Tuesday morning.

The settlement, which only applies to US merchants, is the result of a lawsuit filed in 2005. However, nothing is considered finalized until it receives approval from the US District Court for the Eastern District of New York. Even then, the case can also be appealed in what could be a lengthy battle.

Typically, swipe fees cost merchants 2% of the total transaction a customer makes —but can be as much as 4% for some premium rewards cards, according to the National Retail Federation. The settlement would lower those fees by at least 0.04 percentage point for a minimum of three years.

Trump’s Truth Social is now a public company. Experts warn its multibillion-dollar valuation defies logic

For the first time in almost 30 years, part of Donald Trump’s business empire has gone public. Trading started with a bang, but the frenzy eased considerably by the closing bell, with shares ending well off their highs of the day, reports CNN’s Matt Egan.

Trump Media & Technology Group, the owner of struggling social media platform Truth Social, began itslong-delayed journey as a public companyat Tuesday’s opening bell under the ticker symbol “DJT.”

The stock surged about 56% at the open, to $78, and trading was briefly halted for volatility. Trump Media shares stabilized around $70 before fizzling. By the closing bell, Trump Media ended at $57.99, up by a more modest 16% on the day.

The skyrocketing share price comes despite the fact that Trump Media is burning through cash; piling up losses; and its main product, Truth Social, is losing users.

“This is a very unusual situation. The stock is pretty much divorced from fundamentals,” said Jay Ritter, a finance professor at the University of Florida’s Warrington College of Business, who has been studying initial public offerings (IPOs) for over 40 years.

Ritter said the closest parallel would be GameStop, AMC andother so-called meme stocks that skyrocketed during Covid-19as an army of retail traders piled in. He said Trump Media is likely worth somewhere around $2 a share — nowhere near its closing stock price of $58.

Analysis: Buffett’s favorite market indicator is flashing red | CNN Business (2024)


Analysis: Buffett’s favorite market indicator is flashing red | CNN Business? ›

The “Buffett Indicator

Buffett Indicator
The Buffett indicator (or the Buffett metric, or the Market capitalization-to-GDP ratio) is a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time. › wiki › Buffett_indicator
” is flashing red. In 2001, Warren Buffett came up with what he called in Fortune Magazine “probably the best single measure of where [stock] valuations stand at any given moment.” Today that barometer has soared to a two-year high, signaling that a market retreat could be coming.

What is the Buffett Indicator of the market? ›

The Buffett Indicator is the ratio of total US stock market value divided by GDP. Named after Warren Buffett, who called the ratio "the best single measure of where valuations stand at any given moment".

Is the Buffett Indicator reliable? ›

The Buffett Indicator forecasted an average of 83% of returns across all nations and periods, though the predictive value ranged from a low of 42% to as high as 93% depending on the specific nation.

How to analyze a business Warren Buffett? ›

How to Analyze a Business Model
  1. Metric #1: Simplicity. First, Hagstrom explains Buffett's notion that you should only invest in companies with easily understandable business models. ...
  2. Metric #2: Predictability. ...
  3. Metric #3: Long-Term Competitive Advantage.
Jun 22, 2023

What is Warren Buffett's favorite business? ›

Buffett has said that Apple is a “better business than any we own” at the company's most recent annual meeting, and his portfolio backs up that sentiment. Apple makes up a whopping 45.1% of Berkshire's entire portfolio, a position valued at roughly $163 billion.

What is the formula for the Buffett Indicator? ›

It is calculated by dividing the stock market cap by gross domestic product (GDP). The stock market capitalization-to-GDP ratio is also known as the Buffett Indicator—after investor Warren Buffett, who popularized its use.

How to interpret the Buffett Indicator? ›

Interpreting the Market Cap to GDP Ratio

A Price/Sales ratio of greater than 1.0x (or 100%) is generally considered a sign of being highly valued, while companies trading below 0.5x (or 50%) are considered to be cheap.

What is the fair value of the Buffett Indicator? ›

What returns can we expect from the stock market?
Ratio = Total Market Cap / (GDP + Total Assets of Fed)Valuation
68% < Ratio ≤ 88%Modestly Undervalued
88% < Ratio ≤ 107%Fair Valued
107% < Ratio ≤ 126%Modestly Overvalued
Ratio > 126%Significantly Overvalued
2 more rows

How to use a Buffett Indicator? ›

The Buffett Indicator takes the total market capitalization which includes all the listed companies of a country and divides it with the total GDP - be it annual or quarterly. The Indicator, also known as the market cap-to-GDP ratio, compares a country's overall stock market value to its total annual economic output.

What is the 10x rule Buffett? ›

The rule really is an observation that Buffett has paid ~10x pretax earnings for many of his largest and best deals, ranging from Coca-Cola, American Express, Wells Fargo, Walmart, Burlington Northern, and the more recent Apple investment.

What are Warren Buffett's 5 rules of investing? ›

Here's Buffett's take on the five basic rules of investing.
  • Never lose money. ...
  • Never invest in businesses you cannot understand. ...
  • Our favorite holding period is forever. ...
  • Never invest with borrowed money. ...
  • Be fearful when others are greedy.
Jan 11, 2023

How to analyse a stock like Warren Buffett? ›

How to Invest Like Warren Buffett
  1. Buy businesses, not stocks. ...
  2. Look for companies with competitive advantages that can be maintained, or economic moats. ...
  3. Focus on long-term intrinsic value, not short-term earnings. ...
  4. Demand a margin of safety.
Nov 20, 2023

What does Warren Buffett invest in in 2024? ›

These were the stocks Buffett had in his portfolio heading into 2024. Some top picks of Berkshire are Apple Inc. (NASDAQ:AAPL), Coca-Cola Co (NYSE:KO) and Chevron Corp (NYSE:CVX).

What is the biggest return on investment ever? ›

10 Best-Performing Stocks of the Past 30 Years
Stock30-year total returnValue of initial $10,000 stake
Monster Beverage Corp. (ticker: MNST)191,852%$19.2 million Inc. (AMZN)178,141%*$17.8 million
Apple Inc. (AAPL)96,333%$9.6 million
Biogen Inc. (BIIB)74,990%$7.5 million
6 more rows

Is the market overvalued right now? ›

Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 88% to 149%, depending on the indicator, down from last month's 92% to 154%.

Which is the most commonly used indicator in stock market? ›

The relative strength index is among the most popular technical indicators for identifying overbought or oversold stocks. The RSI is bound between 0 and 100.

What are the three indicators of the stock market? ›

The DJIA, the S&P 500, and the NASDAQ indexes all are indicators of the current state of the stock markets.

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