Trade Alerts

Warren Buffet Peers Into The Next Decade


Folks –

An ongoing conundrum among equity strategists for the last couple of years has been the valuation of stocks. Historically an S&P 500 PE in the high teens would be a warning signal. The Bulls counter that with interest rates so low the lofty valuations are justified. Came across some comments from Jesse Felder on this topic and he pointed to an indicator Warren Buffet began using more than 20 years ago.

According to Jesse, Warren takes the total valuation of stocks compared to GDP and is able to forecast a rate of return for equities over the next decade. The relationship between the projected returns and actual returns tracks pretty well as the chart below reveals. The current forecast for the next decade is that stocks will basically return bupkus. If this prediction is accurate, tactical/dynamic strategies should outperform the Buy and Hold crowd. Hard to imagine buying a 10 Year Treasury today at 1.6% would outperform equities. Finding consistent growing dividend payers is another strategy, the problem there is you will probably have to pay up for them.

A potentially sobering parallel is the Japanese Nikkei which currently resides around 17,000. The sobering part is that the index touched 17,000 for the first time in June of 1986! Thirty years of equity stagnation, it can happen.

More later,


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