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Business Insider
17-05-2025
- Business
- Business Insider
Investors have forgotten about a perfect recession indicator that could come back to bite them in the months ahead
Buzz around the recession indicator, which has preceded every economic downturn since the 1960s, has died out over the last few years. As the Federal Reserve hiked interest rates in 2022, long-end Treasury rates dipped below yields on the short end, sparking fears about the economy's health. But a recession never materialized. While interest in the indicator has fallen, its impressive track record is still worth keeping in mind, as the curve has been inverted for much of this year. The recession that never came a couple of years ago could be now on our doorstep with the labor market starting to slow. "Everybody's forgotten about the yield curve being negative for so long, inverted for so long," Rick Cortez, a portfolio manager at Broadmark Asset Management, told BI earlier in May. Since a heavily forecasted 2023 recession never came to fruition, investors may be more quick to dismiss fears of a downturn this time around, according to Ben McMillan, the CIO at IDX Advisors. "That recency bias is very robust; we see it in conversations almost daily," McMillan told BI on Thursday. "I think it's influencing investor behavior, especially on the kind of more retail end of the spectrum." He continued: "We've talked to a lot of financial advisors that have just very candidly said they're buying the dip for their clients." If a recession does arrive, stocks appear to be in a bad position, with valuations elevated. Stock valuations reflect investor expectations about earnings growth. When they climb to historically high levels, it can be a sign that investors aren't considering downside risks, and are envisioning near-perfect future outcomes. The Shiller cyclically adjusted price-to-earnings ratio is one popular valuation measure. It considers the current price of stocks relative to a 10-year rolling average of earnings, smoothing out earnings performance outliers. Right now, the S&P 500's Shiller CAPE ratio is at one of its highest levels in history. "At the moment, it's way overvalued," Cortez said about the S&P 500. "I mean rivaling 1929." The so-called Warren Buffett indicator, or the market cap of the Wilshire 5000 Index relative to GDP, is also at extreme levels, Cortez said. Of course, a recession is not guaranteed, and the economy could continue to prove resilient. There's also a degree of uncertainty around how stocks would react to a recession since it would depend on its depth and the degree to which the Fed would lend support with rate cuts. Que Nguyen, the CIO of Research Affiliates, said that a recession wouldn't necessarily mean significant downside for stocks, since the S&P 500 already plummeted around 20% this year in anticipation of a recession. "If you really look at the way markets work, the drawdown precedes the recession by 6-12 months, but it rebounds before it actually hits," Nguyen told BI on Friday. "In fact, what happens a lot is it rallies a lot right as the recession is hitting, and the reason it rallies a lot is because the Fed is lowering rates." But this a unique macro cycle. President Trump's April 2 tariffs drove recession fears, which then dissipated as he pulled back on his combative rhetoric, sparking a furious rally back toward all-time highs. With some tariffs still in place, investors are waiting to see how the import taxes impact inflation and corporate profits, and in turn the labor market. With 61% of fund managers now pricing in a soft-landing scenario, according to Bank of America's Fund Manager Survey published May 13, investors could be caught off guard if a downturn does come to pass.
Yahoo
03-05-2025
- Business
- Yahoo
Buffett Indicator Flashes Buy as Stocks Trade Below GDP-Based Fair Value
The Buffett Indicator, a favored valuation gauge of Warren Buffett (Trades, Portfolio), is signaling that U.S. equities may be undervalued. The ratio compares the total market capitalization of the Wilshire 5000 Index to the U.S. gross domestic product and currently sits at 180%, its lowest point since September 2024. The drop follows a volatile year that included a brief but sharp sell-off triggered by a Japanese yen carry trade unwind, which set the stage for a strong S&P 500 recovery in late 2024. Even with a 12% bounce from April lows, the index remains 9% below its February high. Investors are weighing whether stocks can sustain the rebound or if global uncertaintiesincluding the continuation of Trump-era trade tensionswill prompt another correction. Upcoming earnings reports and the next Federal Reserve meeting are expected to shape near-term market direction. By another key measure, the S&P 500 is trading at 20.6 times forward earnings, down about 8% from earlier this year. That remains above the 10-year average of 18.6, indicating some premium still exists. Critics of the Buffett Indicator argue it may overstate market value by ignoring elevated interest rates, which can compress corporate earnings and reduce equity valuations. They also note that valuation tools often fail to time market moves with precision. Still, Buffett has described the indicator as the single best measure of where valuations stand, giving it continued significance among long-term investors. Track every one of Warren Buffett (Trades, Portfolio)'s stock picks. Keep informed of the latest portfolio moves from the legendary investor. This article first appeared on GuruFocus. Sign in to access your portfolio
Yahoo
03-05-2025
- Business
- Yahoo
Warren Buffett's Favorite 'Single Best Measure' For Equities Flashes Buying Signal As US Stocks Rebound
A valuation metric, which Berkshire Hathaway chair Warren Buffett once called the "single best measure of where valuations stand," is now signaling that U.S. equities could be trading at relatively attractive levels. What Happened: Known as the 'Buffett Indicator,' the ratio compares the total value of publicly traded U.S. companies, tracked by the Wilshire 5000 Index, to the country's gross domestic product. The measure currently sits at around 180%, reported Bloomberg, roughly the same level seen after last year's rapid unwinding of the Japanese yen carry trade, which triggered a sharp selloff. That downturn ultimately set the stage for a strong S&P 500 rally in late 2024. The indicator soared to record highs last year, echoing past market bubbles, including the dot-com era in 2000. Its recent dip comes as the S&P 500 has rebounded 12% from April lows, though it remains down nearly 9% from February's record. Also Read: "This is a crucial indicator because it helps traders know when to deploy capital and buy stocks," said Adam Sarhan, CEO of 50 Park Investments. "There are reasons to still be concerned about the global trade war, but if [Donald] Trump isn't playing hardball with tariffs, people are going to buy, buy, buy with valuations much more reasonably priced now." Why It's Important: In a Fortune article from 2001, Buffett characterized this level as "playing with fire," alluding to the dotcom bubble. "Nearly two years ago the ratio rose to an unprecedented level," Buffett wrote. "That should have been a very strong warning signal." Some critics of the Buffett Indicator argue that it overlooks certain important factors like elevated interest rates. Others caution that valuation metrics alone are unreliable for market timing, as assets can remain overvalued or undervalued for extended periods before adjusting, the report said. Many traders are closely watching Berkshire Hathaway's annual meeting on Saturday for any hints that Buffett has begun tapping into the firm's record $321 billion cash reserve to scoop up discounted stocks, the report added. Wall Street continued its rally this week, completely recovering the losses triggered by the Trump administration's April 2 tariff announcement. Mega-cap tech giants — including Microsoft Corp. (NYSE:MSFT), Meta Platforms Inc. (NASDAQ:META), Apple Inc. (NASDAQ:AAPL), and Inc. (NASDAQ:AMZN) — all beat Wall Street estimates, with Microsoft posting its strongest weekly performance in years. The SPDR S&P 500 Trust ETF (NYSE:SPY) was up 1.48% on Friday, while the Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq-100 Index, was up 1.48%, according to Benzinga Pro data. Read NextPhoto: Photo Agency / Shutterstock UNLOCKED: 5 NEW TRADES EVERY WEEK. Click now to get top trade ideas daily, plus unlimited access to cutting-edge tools and strategies to gain an edge in the markets. Get the latest stock analysis from Benzinga? APPLE (AAPL): Free Stock Analysis Report TESLA (TSLA): Free Stock Analysis Report This article Warren Buffett's Favorite 'Single Best Measure' For Equities Flashes Buying Signal As US Stocks Rebound originally appeared on © 2025 Benzinga does not provide investment advice. All rights reserved. Sign in to access your portfolio
Business Times
03-05-2025
- Business
- Business Times
Warren Buffett's favourite valuation indicator flashes buy signal
[NEW YORK] A key valuation metric touted by legendary investor Warren Buffett is signalling that equities are relatively cheap, bolstering the case that the sizzling rebound in US stocks has room to run. The 'Buffett Indicator' measures the ratio of the total value of the US stock market via the Wilshire 5000 Index divided by the dollar value of US gross domestic product. It stands at its lowest level since early September – even after a bounce that has sent stocks screaming higher in recent weeks. The 94-year-old chief executive of Berkshire Hathaway, which will hold its annual meeting in Omaha, Nebraska, this weekend, has said the 'single best measure of where valuations stand' was the ratio of the value of US publicly traded companies to the country's GDP. The indicator blared a warning late last year when it shot to a historic high, echoing similar signals sent during market peaks in 2021 and before the bursting of the dot-com bubble in 2000. The measure is now at 180 per cent, around where it stood after an unwind of the Japanese yen carry trade sparked a brief but intense selloff last year. That stock-market rout cleared the path for a powerful S&P 500 Index rally in the closing months of 2024. 'This is a crucial indicator because it helps traders know when to deploy capital and buy stocks,' said Adam Sarhan, founder of 50 Park Investments, who has been piling into Big Tech stocks. 'There are reasons to still be concerned about the global trade war, but if Trump isn't playing hardball with tariffs, people are going to buy, buy, buy with valuations much more reasonably priced now.' Valuation metrics of all types have taken on added significance this year, as investors try to determine if a tariff-fuelled sell-off has left stocks cheaper relative to their fundamentals. Those calculations are complicated by the S&P 500's 12 per cent bounce from its April lows, which has traders wondering whether to bet on momentum carrying the index further – or beef up hedges and place bearish bets on a trip back down. The index is still down nearly 9 per cent from its February record. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up In addition to the unpredictable twists of US President Donald Trump's trade war, investors are bracing for several more weeks of earnings season and next week's Federal Reserve meeting as potential catalysts that could determine the trajectory of stocks. For its part, the indicator is still above levels it plumbed during past market bottoms, including the Covid-19 sell-off of early 2020, when it fell to nearly 100 per cent. Other commonly used valuation gauges tell a similar story: The S&P 500, for example, now sits at 20.6 times forward earnings, down about 8 per cent from earlier this year, though still above the 10-year average of 18.6 times. Critics of the Buffett indicator argue that, among other things, the measure may ignore the effects of elevated interest rates. Higher borrowing costs can eat into company profits and weigh on stock prices. Some strategists also maintain that valuation is a poor tool for timing market moves, since assets can stay cheap or expensive for a long time before correcting. That said, few investors would ignore a measured lauded by Buffett, who is famous for buying on the cheap. Traders are eagerly awaiting Berkshire's annual meeting on Saturday (May 3), in part to glean any clues on whether Buffett has dipped into the company's cash pile – last reported at a record US$321 billion – to take advantage of bargains in the market. It may be one of the last meetings for Buffett, who told shareholders in the company's annual letter earlier this year that 'it won't be long before' a successor takes over as CEO, likely Berkshire's Greg Abel. Buffett 'has always been a long-term investor', said Scott Colyer, CEO at Advisors Asset Management. 'It will be crucial to hear what he says about the economy and whether cheaper valuations indeed pushed him to deploy all that cash to buy stocks during the sell-off.' BLOOMBERG
AU Financial Review
03-05-2025
- Business
- AU Financial Review
Warren Buffett's favourite valuation indicator flashes buy signal
A key valuation metric touted by legendary investor Warren Buffett is signalling that equities are relatively cheap, bolstering the case that the sizzling rebound in US stocks has room to run. The 'Buffett Indicator' measures the ratio of the total value of the US stock market via the Wilshire 5000 Index divided by the dollar value of US gross domestic product. It stands at its lowest level since early September, even after a bounce that has sent stocks screaming higher in recent weeks.
