Tycoon Warren Buffett, considered by many to be the best investor in the history of financial markets. Photo: EFE
The so-called “Buffett gauge,” Warren Buffett’s favorite market gauge, just hit 200%, indicating that stocks are highly overvalued and that a steep stock market crash is likely to come.
The gauge named after the founder and CEO of Berkshire Hathaway takes the combined market capitalization of all publicly traded U.S. stocks and divides it by the most recent quarterly gross domestic product (GDP) figure. Investors use it as a rough indicator of the valuation of the stock market relative to the size of the economy.
The Wilshire 5000 Total Market Index rose to $ 44.3 trillion on Tuesday, while the latest US Q1 GDP estimate is $ 22.1 trillion, putting the Buffett gauge at 200%. , Insider reported.
By comparison, the index reached 187% in the second quarter of 2020, when the pandemic was in full swing and GDP was about 12% lower.
In an interview with Fortune magazine in 2001, the Omaha oracle called the index that bears his name “probably the best individual measure of where valuations are at any given time.”
Notices during previous stock market crashes
The Berkshire Hathaway CEO added that when the gauge hit an all-time high during the dot-com bubble in the 2000s, it should have been a “very strong warning sign” of the collapse to come. The index also spiked in the run-up to the 2008 global financial crisis, making it a useful tool for anticipating market downturns.
Therefore, the fact that the index is at 200% could indicate a fall in the markets, especially if it remains at those levels.
But it is still possible for the gauge to recede from record levels if the economic reopening boosts GDP this quarter, Insider said.
The Buffett indicator does not take into account that companies listed in the United States do not always contribute to the American economy and GDP ignores foreign income.
The pandemic has also disrupted economic activity and depressed GDP since last spring, inflating the Buffett gauge readings, Insider warned.
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Apple shares reflected on a Nasdaq panel in Time Square, New York. Photo: REUTERS / Shannon Stapleton
Mass sale of shares
Meanwhile, another report from the publication indicated that Berkshire Hathaway has taken billions of dollars from Chevron, Apple and Costco in recent months, but does not seem to indicate that it is a move of preparation for a catastrophe in the markets. Warren Buffett’s company had more than $ 140 billion in cash at last count.
Although that number may seem astronomical, investor Chris Bloomstran said that amount represents about 16% of his 884 billion total assets, not far from the average of 12% in the last two decades. “It is not so much cash,” he said.
If you subtract the roughly $ 60 billion that Berkshire reserves for insurance losses, working capital and other current and potential costs, the company has about $ 80 billion to spend on stocks, acquisitions, buybacks and other opportunities, the expert said. Whether Berkshire rolls out that money in the next six months or the next six years makes little difference to its medium-term outlook, he added.
Berkshire bet on Japanese pharmaceutical stocks and trading houses last year, during the Covid 19 crisis, and could cut other peripheral positions in the coming months, Bloomstran said.
Closing meaningful positions
Notably, Buffett’s company sold about 6% of its gigantic Apple stake and ditched its entire position at Costco in the second half of 2020. The Berkshire boss said those moves were likely mistakes at the annual shareholders meeting on last month, and revealed that his business partner, Charlie Munger, warned him not to sell.
However, Bloomstran argued that both decisions made sense, given the aggressive valuations of Apple and Costco in the market. Berkshire had already tripled its money at the iPhone maker, and the stock was approaching 45% of the total value of its stock portfolio. Meanwhile, Costco shares were trading above historical levels, a sign that it was okay to sell them.
Buffett recently warned novice investors not to get carried away by their initial earnings and criticized the Robinhood platform for encouraging people to compulsively gamble on stocks.
In any case, Berkshire Hathaway’s financial moves will continue to be scrutinized as a possible indicator of what Buffett foresees for the future.