By Kristin Hovencamp
The general question on investors’ minds seems to be: How long can the stock market sustain its historic gains? If you listen to the news, you will undoubtedly hear pundits debate whether the market has become too frothy. When is the bubble going to burst? How can we predict when a crash is coming?
In Waiting for the Last Dance, value investor Jeremy Grantham described the current bull market as a “fully-fledged epic bubble.” Understandably, we are all concerned that the market has potentially reached its peak, and stocks are no longer trading on fundamentals. The Buffett Indicator, a popular gauge used to determine if the market is overvalued, has been a historically good predictor.
The Buffett Indicator is a measure of the U.S. stock market’s total value divided by the economy’s gross domestic product (GDP). If the market is trading below GDP, this suggests it is trading on fundamentals, and there are buying opportunities. If stocks are trading well above GDP, this indicates a sell signal. Buffet described the indicator as “probably the best single measure of where valuations stand at any given moment.”
Proponents of this bull market point to low-interest rates (and Fed capital infusions) to justify high market valuations and sentiment. Fixed-income investments offer little to no yield, and with few safe options, investors are seeking opportunities in equities. As stock prices become elevated, a company’s stock may trade well above valuations despite weak fundamentals. Dr. Ed Yardeni suggests, “Investors are partying with abandonment.”
The Buffett Indicator reveals equities have been overvalued for several years. A market correction is imminent, be it next month or next year. My two cents recommend you tune out the noise and focus on your established financial plan. Market timing is a fool’s errand. Whether you are bullish or bearish, this is a good reminder of why, as investors, we take a long-term outlook.
Kristin Hovencamp is an Investment Executive, and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605. HazlettWealthManagement.com