The Buffett Indicator set bleak records right up to the pandemic this year. As the IMF slashes GDP forecasts, the indicator points to a harrowing stock market correction ahead.
The International Monetary Fund (IMF) had some terrible news for the stock market Wednesday.
The organization said the economic pain from coronavirus and containment measures would be even worse than it projected in April. Back then, global asset prices were imploding in fear, uncertainty, and doubt. The world economy was on pause like never before in history. The IMF forecast global GDP would shrink by 3%. But today it updated that dreary projection to a positively bleak 4.9% contraction.
Global growth is projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.
Meanwhile, the IMF expects the world’s 2021 GDP to grow by 5.4%. The report noted that’s 6.5% lower than 2021 projections in January before the pandemic. What makes it even worse is that the 2021 growth percentage will be over an abysmal 2020 GDP baseline. The world’s top economists are writing off this year and next as two lost years in economic progress because of coronavirus. If their forecasts are correct, it will take nearly until 2022 to catch up to world GDP going into the new decade.
Stock market benchmarks went into free fall after the International Monetary Fund’s report. The Dow dropped nearly 3% in the morning session. The S&P 500 was close behind, down by 2.84% at noon Eastern. And the Nasdaq paused its exuberant foray into new record territory this month.
The updated IMF forecast is grim for lofty stock market valuations in a bull market that have left many analysts wholly baffled. Last week, David Tice, who manages the AdvisorShares Ranger Equity Bear ETF (NYSEARCA:HDGE), told CNBC’s “Trading Nation” he’s never seen stock prices so disconnected from the economy:
I find the biggest disconnect that we’ve ever seen in my 35-year history of watching Wall Street between fundamentals of the economy and the stock market.
Business genius Warren Buffett would likely agree.
The “Buffett Indicator” is a simple formula to check the temperature of the overall stock market. Take the total U.S. market capitalization, the value of all stocks, and divide by GDP. The further north of 100% the result, the more overheated stock prices are. It’s been soaring at record levels for much of the decade-long bull run on equities.
Since March, stocks have rallied like never before. As the IMF continues to slash GDP growth projections, the Buffett indicator will soar even deeper into the danger zone.
Wednesday’s indicator readout of 148% warns of a brutal correction ahead. It’s already more top-heavy than at the height of the 2000 Nasdaqbubble and the more recent housing bubble.
The IMF forecasts for global GDP are in line with harrowing U.S. GDP projections from the Congressional Budget Office. Earlier this month, the CBO estimated the U.S. economy would lose $8 trillion over the next decade because of what happened this year. That’s after adjusting for another $8 trillion loss of purchasing power to inflation.
And stock prices aren’t merely decoupling from the economy at historical extremes. RBC Capital Markets data revealed Tuesday that valuations are also out of sync with corporate multiples.
As stocks heat up, the forward S&P 500 P/E ratio has jumped to 22.18, near 20-year highs. Share prices are soaring like never before as productivity and earnings crash. This may be the most dangerous equities rally in history.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 2:01 PM