{"id":238088,"date":"2025-05-12T13:26:44","date_gmt":"2025-05-12T13:26:44","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/investing\/buffett-indicator-shiller-pe-ratio\/"},"modified":"2025-05-12T13:26:44","modified_gmt":"2025-05-12T13:26:44","slug":"buffett-indicator-shiller-pe-ratio","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=238088","title":{"rendered":"Buffett Indicator & Shiller PE Ratio"},"content":{"rendered":"


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\"Buffett<\/p>\n

Canyonland National Park<\/em><\/p>\n

Over the last few weeks I\u2019ve been setting Trailing Stop Loss Orders (TSLOs) for VTI, VOO, and SCHG when portfolios holding these securities come up for review.\u00a0 The tariff wars are causing market uncertainty, but tariffs are not the only reason for setting TSLOs.\u00a0 Erratic administration behavior only exacerbates an overbought market.<\/p>\n

Yesterday I ran across this YouTube video<\/a><\/strong><\/em><\/span> which aligns with my current thinking regarding the U.S. Stock Market.\u00a0 Avoid the advertisement around the eight minute mark.<\/p>\n

A few readers may remember the period from around 1967 through August of 1982.\u00a0 In the mid to late 1960s the Dow Jones Industrial Average (DJIA) topped 1,000 for the first time.\u00a0 In August of 1982 it was below 800.\u00a0 That was a lost 15 years of market growth and not a good time to retire if one needed savings to live.\u00a0 From 2000 to 2012 was another fallow market period.\u00a0 We may well be heading into another such period if we check out the Buffett Indicator and Shiller PE Ratio.\u00a0 These two indicators are among the best long-term data sources when it comes to broad U.S. Equities behavior.\u00a0 Neither is perfect, but none are as the market always behaves in an unpredictable fashion.<\/p>\n

Buffett Indicator:\u00a0<\/a><\/strong><\/em><\/span><\/p>\n

Check out the above graph and look for periods around 2000 and 2008 or times when the market took a major hit.<\/p>\n

\u201cThe Warren Buffett Indicator, also known as the Market Capitalization to GDP ratio, is a valuation metric that compares a country\u2019s total stock market value (market capitalization) to its gross domestic product (GDP). It\u2019s named after the famous investor Warren Buffett, who has used this metric to assess whether the stock market is overvalued or undervalued\u201d<\/span><\/p>\n

\u201cThis ratio fluctuates over time since the value of the stock market can be very volatile, but GDP tends to grow much more predictably. The current ratio of 211% is approximately 66.99% (or about 2.2 standard deviations) above the historical trend line<\/span>, suggesting that the stock market is Strongly Overvalued<\/span> relative to GDP.\u201d<\/span><\/p>\n

The recent GDG is negative, yet the market is moving higher.\u00a0 Don\u2019t expect this to continue.<\/p>\n

Shiller PE Ratio<\/a><\/strong><\/em><\/span><\/p>\n

\u201cThe cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P\/E, or P\/E 10 ratio, is a stock valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation<\/b>.<\/span><\/span>\u201c<\/span><\/p>\n

\u201cThe CAPE ratio is a valuation measure that uses real earnings per share (EPS)<\/a> over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle<\/a>.\u201d<\/span><\/p>\n

\u201cThe CAPE ratio, an acronym for cyclically adjusted price-to-earnings ratio, was popularized by Yale University professor Robert Shiller. It is also known as the Shiller P\/E ratio. The P\/E ratio<\/a> is a valuation metric that measures a stock\u2019s price relative to the company\u2019s earnings per share. EPS is a company<\/a>\u2019s profit divided by the outstanding equity shares.\u201d<\/span><\/p>\n

\u201cThe CAPE ratio is generally applied to broad equity<\/a> indexes to assess whether the market is undervalued or overvalued. While it is a popular and widely followed measure, several leading industry<\/a> practitioners have called into question its utility as a predictor of future stock market returns.\u201d<\/span><\/p>\n

I am more familiar with the Shiller PE Ratio than I am with the Buffet Indicator.\u00a0 If an average Shiller Ratio is around 15 to 17 and it is currently bouncing around 35, this is an overbought market.<\/p>\n

What To Do?<\/strong><\/p>\n