Tags: Buffett | ratio | stocks | overvalued

Atkinson: Buffett Ratio Indicates Stocks 34 Percent Overvalued

By    |   Friday, 10 July 2015 07:12 AM

Investment expert Jimmy Atkinson offers 10 reasons why the stock market may be overvalued in a column on ETF Reference. Here are four of them.
  • Warren Buffett has cited the ratio of total market capitalization to GDP as "probably the best single measure of where valuations stand at any given moment." That ratio is considered fairly valued between 75 and 90 percent. A reading above 115 percent is considered significantly overvalued. The ratio now? 124 percent. Uh oh.
  • Robert Shiller's cyclically-adjusted price-earnings ratio, which includes 10 years of earnings, stands at 26.5 for the S&P 500 index. Recent levels have been topped only by the pre-crash periods of 1929, 1999-2000 and 2007.
  • The appreciation of the S&P 500 index has outpaced its sales growth, generally by a large amount, in 19 of the last 25 quarters.
  • The S&P 500 price-to-sales ratio reached a 14 year high at the end of 2014.
Meanwhile, many financial experts have noted the risk posed to stocks by Greece's debt crisis, China's stock plunge and a likely Federal Reserve interest rate increase this year.

But few have as dire a forecast as Charles Robertson, chief economist of Renaissance Capital. He predicted on CNBC that the S&P 500 index will crater to 1,100 by March 2016. That represents a 47 percent drop from 2,062 Thursday morning.

As for the troika of doom, Greece is struggling to meet the eurozone's Sunday deadline to reach an accord on a debt restructuring package. In China, the Shanghai Stock Exchange Composite Index has slid 28 percent since June 12. And in the United States, economists expect the Fed to raise rates in September or December.

"We're seeing just how fragile it is with that Greek crisis right now," Robertson said. "The second risk is China. That's always a possible problem, which could provoke something much worse. The third is a Fed rate hike, [which has] more unexpected consequences than people assume ahead of time."

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Investment expert Jimmy Atkinson offers 10 reasons why the stock market may be overvalued in a column on ETF Reference. Here are four of them.
Buffett, ratio, stocks, overvalued
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2015-12-10
Friday, 10 July 2015 07:12 AM
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