US Markets Kick Off 4th Quarter Significantly Overvalued - Stockxpo - Grow more with Investors, Traders, Analyst and Research

US Markets Kick Off 4th Quarter Significantly Overvalued

On Friday, Berkshire Hathaway Inc. (

BRK.A, Financial)(BRK.B, Financial) CEO
Warren Buffett
(Trades, Portfolio)’s favorite market indicator stood at 145.7%, down from the Sept. 1 reading of 151.6%.

Buffett’s market indicator declined from the Sept. 1 reading on the back of U.S. market indexes slumping in September, with the Dow Jones Industrial Average, Nasdaq Composite Index and the Standard & Poor’s 500 index declining 4.3%, 5.3% and 4.8%, respectively.


US markets begin October with gains

U.S. markets begin October with gains following Merck’s (

MRK, Financial) new oral Covid-19 treatment announcement. The Dow closed at 34,326.46, up 482.54 points from the previous close of 33,843.92. Likewise, the Nasdaq closed at 14,566.70, up 118.12 points, and the S&P 500 closed at 4,357.04, up 49.50 points from Thursday’s close.

Merck, one of Berkshire’s health care holdings, announced that its joint oral treatment with Ridgeback Biotherapeutics reduced the risk of hospitalization and death by approximately 50% among Covid-19 patients. The companies plan to seek emergency authorization for the treatment.

Market enters October with a September decline

Figures 1, 2 and 3 illustrate the Aggregated Statistics Charts for the Dow, Nasdaq 100 and S&P 500 in terms of the three-month total return.


Figure 1: 3-Month Total Return for Dow Jones Industrial Average Stocks


Figure 2: 3-Month Total Return for the Nasdaq 100 Stocks


Figure 3: 3-Month Total Return for S&P 500 Stocks

As the figures illustrate, the 30 stocks in the Dow had a mean three-month total return of 1.81%, with a median of 2.14%. For the S&P 500 stocks, the mean three-month total return is -0.34% with a median of -0.16%.

Stocks declined during September as investors grappled with inflation fears and slowing growth. Chris Hussey, a managing director at Goldman Sachs Group Inc. (

GS, Financial), added in a note that he sees other headwinds like China, fading fiscal stimulus and supply chain bottlenecks.

Market remains significantly overvalued to begin October

Despite the September decline, the U.S. market remains significantly overvalued based on Buffett’s favorite market indicator, with the Wilshire 5000 Full Cap Price Index trending approximately 1.45 times the sum of gross domestic product and total assets of the Federal Reserve.


Based on the current market valuation level, the implied return of the U.S. market is -0.9% per year assuming that valuations revert to the 20-year-median market valuation level.

GuruFocus also considered an optimistic case in which valuations revert to 130% of the 20-year-median market valuation level and a pessimistic case in which valuations revert to just 70% of the 20-year-median market valuation level. According to these scenarios, the implied market return ranges from -5% to 0.40%.

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