No. of Recommendations: 4
βThe Wilshire 5000 to GDP ratio sits around 195%.
Higher than the ratio preceding the dot-com bubble crash as well as the Great Financial Crisis in 2007-2008.β
https://finance.yahoo.com/news/warren-buffett-indi...Who knows what will happen from here. It can go even higher. It can fall back dramatically.
Berkshire will do okay regardlessβ¦
No. of Recommendations: 0
Berkshire will do okay regardlessβ¦
In the long run. How much time do we older folks have left? π
No. of Recommendations: 13
It might not be as bad as it appears, if you are an optimist.
Net profits and free cash flow are hugely higher as a fraction of GDP in recent years...much higher than even the top of their range from roughly 1950-2004. Consequently, if you think they'll stay high, which is a very big "if", the valuations aren't nearly as terrible as that ratio suggests.
For example, consider the moment at the little short term peak in 2010, when total market cap to GDP was 1:1. Measured one way, the S&P 500 price to free cash flow ratio was about the same then as it was Q4 last year (both up ~75% or something like that), so on that view the "problem" is only the size of the market run-up in 2024, which has in any case been concentrated in just a few big firms. No big deal, just normal variation in the scarily named "zone of reasonableness".
Conversely if you think US profitability will fall back to the late 20th century norm, then look out below. In effect, that means price/sales ratios going back to their old normal range, which is so far below current levels that you'd need a telescope just to see the numbers.
Jim
No. of Recommendations: 1
Buffett indicator may need to revised a bit since a lot of the big names in the S&P 500 index are global companies now. Instead of comparing it to US GDP, perhaps a better denominator would be a weighted world index (ex-China & Russia). I suspect even on this metric, we would find that US markets are overvalued.
No. of Recommendations: 7
Buffett indicator may need to revised a bit since a lot of the big names in the S&P 500 index are global companies now.
I've looked at this. Oddly, it's not nearly as big a factor as you might expect.
Yes, big US firms get a lot of revenue outside the US...but they always did. It's higher now, but not night-and-day higher. For example, US-source S&P 500 revenue was about 73.5% in 1992 and is about 70.9% now. (The S&P 500 isn't the whole US public market, but presumably it accounts for the lion's share of total export revenue by listed firms)
The other issue is what fraction of business activity counted in GDP is captured by non-US and private firms. Another valid concern, but I don't think it changes very rapidly.
Jim
