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Obey 'Buffett Indicator' and Bail on Overpriced Market

Obey 'Buffett Indicator' and Bail on Overpriced Market
Warren Buffett (Getty Images/Paul Morigi)

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Thursday, 30 January 2020 05:39 PM Current | Bio | Archive

“Be fearful when others are greedy…”Warren Buffett

Lately, it doesn’t seem to take much to provide stock market investors with reason to buy and continue to push the market upwards. Each day some sort of data, information, or report is presented, and the financial media & stock market cheerleaders seem to find a way to put a positive spin on it.

As a result, the markets continue to shrug off bad news and keep chugging away.

Optimism seems to be at an all-time high as P/E ratios continue to climb.

For those of us who are on the more conservative side of how we manage our retirement savings, like all retirees and anyone close to retirement age should be, it can be natural to second guess our strategies as we watch the stock market continue to rise even though the fundamentals don’t warrant such a ride up.

It’s no secret that the Fed has shown its willingness to do what it can to support the stock market with its cheap money policies. Whether we call it Quantitative Easing or Overnight Repos, the result is the same.

We’ve seen it before…the Fed acting in a manner that makes equity markets seem more attractive to investors than the more conservative options. As a result, many just keep pumping money into a seemingly invincible market.

During times when confidence and optimism are near all-time highs, it can be easy to get caught up in the excitement and feel like we are missing out. If you are dealing with these types of feelings, I think now is a good time to take a step back to regain some perspective.

Although today’s stock market might be great for traders with short-term outlooks, when it comes to planning and saving for retirement, a long-term outlook is the key to success.

So, what’s the outlook for the next few years?

Well, the IMF recently forecast a slowdown in Gross Domestic Product for the U.S., China, and Japan in 2020 and 2021 — due to an expected sharp slowdown in India, where problems in the financial sector have stifled lending and consumer spending.

Another point to consider is how Warren Buffett has said that the single best measure of the stock market at any given time is Total Market Capitalization (TMC) versus GDP.

The “Buffett Indicator”, as it’s known, states that if TMC is less than or equal to 75%, the stock market is undervalued; if it’s between 75 and 90%, the market represents a fair value; if it’s above 90% it is overvalued — and if it surpasses 140%, it’s considered a ratio of “extreme danger”.2

As of January 24, 2020, the ratio stood at 157% — higher than its peak of 136.9% in 2000, ahead of the dot-com crash.

Although the market could have another up year in 2020, now does not seem like a sensible time for anyone who is retired or close to retirement age to lose their focus as a result of their fear of missing out.

Instead, now is the time to be extra careful to avoid making any mistakes that could negatively impact your quality of life during retirement.

If you’re interested in learning more about how to protect your retirement savings from economic uncertainties, visit The RetirmementIncomeStore.com to sign up for a complimentary three-month trial subscription to The Retirement Income Store® Newsletter.

David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned Money Manager, Amazon Bestselling Author, national TV Host of The Income Generation, Founder of Sound Income Strategies, LLC, The Retirement Income Store®, and Advisors’ Academy. With over 30 years of experience in the industry, Dave specializes in income-generating savings and investment strategies.

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DavidJScranton
For those of us who are on the more conservative side of how we manage our retirement savings, like all retirees and anyone close to retirement age should be, it can be natural to second guess our strategies
buffett, stock, market, overpriced, overvalued
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2020-39-30
Thursday, 30 January 2020 05:39 PM
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