The Oracle of Omaha has been building a warchest of cash and generally when that happens it is because he’s betting on a discount buying opportunity.
Whether that comes to fruition and we see a drop in stocks in the next year or so is anyone’s guess. However, it seems the chart in this post is an indicator Buffett pays attention too.
Wilshire 5000 to GDP Ratio
The Wilshire is considered the benchmark index to measure all U.S. equities. After all it has 6,700 stocks in it, thus we can be comfortable that it is a solid representation of the broader market.
Well apparently Buffett, and others, use the index against nominal quarterly gross domestic product (GDP) to determine valuation of the market.
That is what the chart is showing and as you can see based on that measure the market is valued high – as high as it was in 2008 with valuation climbing for nearly 10 straight years.
Does this guarantee stocks will go lower? – Nope. I learned long ago that nothing has to happen, we can always get more overvalued.
It does mean there is alot of downside risk right now for what is likely limited upside, which is usually not the risk profile you want for an investment.