Stock Market Forecast By Market Cap/GNP Ratio

April 24, 2014

Recently, it was reported Warren Buffett the world’s richest man is accumulating massive amounts of cash, implying stocks may be over-valued. The Sage of Omaha’s net worth tops $63 Billion, which was made entirely from his stock market investments over the decades.  The possible reason billionaire Buffett is going to cash may be based on his favorite stock market metric to determine whether stocks are undervalued or overvalued:  Market Cap/GNP Ratio. 

As pointed out by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.” Although GNP is different from GDP (gross domestic product), the two numbers have always been within 1% of each other.

A recent study of the Buffett’s Market Cap to GDP Valuation Indicator was made by analyst Doug Short. He created the following chart, which plots the Buffett Indicator from 1950 to 2014.

Since 1969 the Buffett Indicator forged four peaks, which were SELL SIGNALS for Dow Stocks. These peaks occurred in 1969, 1972, 2000 and 2007. Each was the forerunner to horrific Bear Market Corrections in stocks.  Here’s what happen in each case:

Bear Market Period……Percent Drop in Dow Index…..Bear Market Duration

Fast forward to March 2014 and we see Buffett’s Market Cap to GDP Valuation Indicator at 125%.  This is the second highest ratio metric registered in the past 64 years (since 1950).  This does NOT mean the Market Cap/GDP Ratio cannot go higher. HOWEVER, it emphatically says STOCKS ARE TODAY GROSSLY OVER-VALUED, which is certainly one of the cardinal reasons why he is selling off stocks in order to build his cash position. Internet sources reveal the Oracle of Omaha’s flagship Berkshire had reached a record of $42.6 billion cash position on yearend 2013. Needless to say that’s a monumental amount of money earning nearly ZERO INTEREST. 

This obviously begs the question: 

Does investment guru Buffett believe his favorite stock market metric (Market Cap/GNP Ratio) might be indicating that a ominous Bear Market Correction looms on the horizon?! 

What Does the Above Chart and 4 Bear Market Data Tell Us?

The "Buffett Index" and corresponding Bear Market Data clearly demonstrates that today's stock market is at lofty valuations… and to be sure now above the housing-bubble peak in 2007.

Stock Market Forecast By Market Cap/GNP Ratio

The following Stock Market forecasts assume and take into account the following:

  • Stocks have indeed peaked
  • The P.E.R. is at historic highs
  • The Dividend Ratio is at historic record lows
  • The NYSE Margin Debt Ratio is at an all-time record high level, and
  • The Five-Year Bull/Bear Market cycle repeats
  • The historically high Market Cap/GNP Ratio has peaked

CONSEQUENTLY:

The Dow Index might fall to 9500 support by mid-2016.

The S&P500 Index might fall to 1100 support by mid-2016.

The Wilshire 5000 Index might fall to 11600 support by mid-2016.

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Related market studies of interest are:

Stocks Forecast For 2014

2014…Déjà vu 2000 & 2008?

Ides Of March 2014

Stocks Are Hell Bent To Suffer A Sharp Correction In 2014correction-2014

 

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Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will soon be recognized as legal tender in all 50 US states…and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

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