Michael Lombardi is a bear. Canadian-born, Lombardi has been dishing out investment advice for decades. He is getting nervous. And so should pension fund managers trying to make up for lost time.
In his March newsletter, Lombardi looked at the Warren Buffett Indicator:
According to Buffett’s favorite valuation metric, stocks are significantly overvalued.
The market-cap-to-GDP ratio is affectionately referred to as the Warren Buffett Indicator. Back in 2001, Buffett told Fortune magazine that “it is probably the best single measure of where valuations stand at any given moment.”
The Warren Buffett Indicator compares the total price of all publicly traded companies to gross domestic product (GDP). It is a great tool to correlate stocks to valuations. After all, stocks are a reflection of the broader economy, and there should be some sort of link between economic output and earnings. On top of that, this should also be reflected in stocks and their valuations, and help investors decide whether they should buy, sell, or wait.
By all accounts, Warren Buffett is waiting.
A reading of 100% suggests that U.S. stocks are fairly valued. The higher the Warren Buffet Indicator is over 100%, the more overvalued the stock market. The market-cap-to-GDP ratio is currently at 127.1%.
Not content with scaring his scribers with this, Lombardi looked at two other indicators: the CAPE ratio, and the Wilshire 5000/market cap index. The Case-Shiller adjusted price-to-earnings ratio for the S&P 500 Index shows the market to be overpriced by 75 percent. The Wilshire/market cap index? It just touched an all-time high.
And, of course, there’s the master himself. At the end of the third quarter, Berkshire Hathaway reported holding $85 billion in cash. According to Lombardi the only opportunity that Buffett sees, according to his own rules, is Berkshire Hathaway stock!