OmniDivitia Wealth Management, Inc. - ODWM Blog #S&P 500OmniDivitia Wealth Management, Inc. - ODWM Blog #S&P 500https://www.omnidivitia.com/blogs/tag/s-p-500Sun, 12 Apr 2026 16:05:25 -0700http://zoho.com/sites/<![CDATA[Is this the Speculation Era?]]>https://www.omnidivitia.com/blogs/post/is-this-the-speculation-era

The Buffett Indicator: A 25-Year Rollercoaster Ride for Market Valuations


In recent years, there has been some concern about the stock market's seemingly high valuations by common fundamental measures, yet it still seems to climb higher.  Rather than debate right or wrong, I thought a deeper dive on a popular indicator could be worthwhile.  Years ago, Warren Buffett discussed some metrics he found valuable in an interview, and soon after the "Buffett Indicator" was born.

A comprehensive analysis of the Buffett Indicator over the past quarter-century reveals a market that has navigated dot-com euphoria, weathered a devastating financial crisis, and surged through a pandemic-induced recession, pushing valuations to historic highs. The indicator, a favored metric of legendary investor Warren Buffett, provides a stark, big-picture view of whether the U.S. stock market is, in his words, "cheap" or "expensive" relative to the nation's economic output.1

The Buffett Indicator is calculated by dividing the total market capitalization of all U.S. publicly traded stocks by the country's Gross Domestic Product (GDP).2A ratio of 100% is often considered a baseline for fair valuation, where the stock market's value aligns with the annual output of the entire economy.3 Levels significantly above this threshold suggest potential overvaluation, while those below may indicate that stocks are undervalued.

Here is a 25-year chart of the Buffett Ratio, using the Wilshire 5000 Total Market Index as a proxy for the total market capitalization and the U.S. Nominal GDP.

The Buffett Ratio: 2000-2024

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YearWilshire 5000 (Year-End)U.S. Nominal GDP (Billions)Buffett Ratio (%)
200014,751.64$10,284.80143.4%
200111,447.80$10,621.80107.8%
20028,793.30$10,977.5080.1%
200311,333.30$11,510.7098.5%
200412,485.40$12,274.90101.7%
200512,963.70$13,093.7099.0%
200614,603.90$13,855.90105.4%
200714,849.50$14,477.60102.6%
20088,996.90$14,718.6061.1%
200911,211.50$14,418.7077.8%
201013,111.40$14,964.4087.6%
201113,061.30$15,517.9084.2%
201214,792.80$16,155.3091.6%
201319,706.03$16,768.10117.5%
201420,812.80$17,427.60119.4%
201520,587.30$18,120.70113.6%
201621,796.60$18,624.50117.0%
201726,273.40$19,390.60135.5%
201824,795.10$20,580.20120.5%
201932,948.41$21,433.20153.7%
202039,081.44$20,953.00186.5%
202149,279.30$23,000.00214.3%
202240,323.50$25,462.80158.4%
202349,019.80$26,949.60181.9%
202459,833.50$29,200.00204.9%

Note: 2024 GDP is a projection.

Analysis of the 25-Year Trend

The chart vividly illustrates the dramatic swings in market valuation over the last two and a half decades, punctuated by major economic events:

The Dot-Com Bubble and Bust (2000-2002): The 21st century began at the peak of the dot-com mania, with the Buffett Indicator at a then-lofty 143.4%. The subsequent crash of technology stocks brought the ratio plummeting to a low of 80.1% by the end of 2002, signaling a period of significant undervaluation.

The Calm Before the Storm (2003-2007): The market then entered a period of recovery and relative stability. The Buffett Indicator hovered around the 100% mark, suggesting a fairly valued market in the years leading up to the next major crisis.

The Great Financial Crisis (2008): The collapse of the housing market and the ensuing global financial crisis sent the stock market into a freefall. The Buffett Indicator reached its nadir for the 25-year period at the end of 2008, hitting a deeply undervalued 61.1%. This marked a prime buying opportunity for long-term investors.

The Long Bull Market and Rising Valuations (2009-2019): A decade-long bull market followed the 2008 crisis, driven by low interest rates and steady economic growth. During this time, the Buffett Indicator steadily climbed, surpassing the 100% mark around 2013 and continuing to ascend, indicating that stock market growth was outpacing GDP growth. By the end of 2019, the ratio stood at a historically high 153.7%.

The COVID-19 Pandemic and Unprecedented Highs (2020-2024): The brief but sharp market downturn at the onset of the COVID-19 pandemic was quickly followed by a massive infusion of government stimulus and a surge in investor enthusiasm, particularly in the technology sector. This propelled the Buffett Indicator to unprecedented levels, reaching an all-time high of 214.3% at the end of 2021. After a pullback in 2022 amid inflation concerns and interest rate hikes, the indicator has since rebounded and, as of the end of 2024, stands at an elevated 204.9%, a level that historically suggests a significantly overvalued market.

In conclusion, the 25-year journey of the Buffett Indicator showcases a market that has repeatedly cycled through periods of boom and bust. While it is not a tool for timing short-term market movements, it provides invaluable long-term perspective. The current elevated reading suggests that investors should proceed with caution, as history has shown that periods of extreme overvaluation are often followed by market corrections.


Disclaimer: At least some of this content was created with the assistance of artificial intelligence (A.I.).  Please be sure to do your own research &/or contact your financial advisor regarding your specific situation.

Looking for More Insight?
]]>Fri, 06 Jun 2025 14:07:09 -0500<![CDATA[The Soft Stuff Matters]]>https://www.omnidivitia.com/blogs/post/the-soft-stuff-matters A thought on your portfolio's "total return."  (If you were told there would be no math today, I apologize in advance.) ]]>

The Magnified Impact of Investor Sentiment

A thought on your portfolio's "total return."  (If you were told there would be no math today, I apologize in advance.) 


Total Return has two parts to it:  appreciation & income.  If  you view owning a stock like you are an owner of a company, you want it to be profitable and have solid cash flow.  That perspective makes it easier to focus on the yield generated in your portfolio (dividends and interest).  However, as an investment, you also consider appreciation, which can be much more speculative, or at least fickle in nature.  


Think of something as simple as the P/E ratio, which is just another way of saying how much you're willing to pay for an investment for every dollar of a company's earnings  It's one representation of investor sentiment.  Why is this important?  Because uncertainty impacts investor sentiment in addition to the potential impact on corporate earnings.


Consider the two investors below.  Let's assume that the S&P 500 is around 6100, and both use research that shows the estimated earnings for the S&P 500 will be $280 over the next 12 months ("forward earnings").  This puts the forward P/E at roughly 21.8.

Photo by Icons8Team on Unsplash

Ryan wants to manage his portfolio risk.

Ryan is 30 years old, is a high earner, and has some additional cash that he would like to invest.  However, he is also concerned that the market is going to come down significantly for a number of reasons, so he doesn't want to invest right now.  Instead, he guesses that the forecasted earnings for the S&P will only reach $260, not $280.  Not only that, but Ryan isn't willing to pay the same amount for those earnings.  He will only invest if the forward P/E ratio reaches 20.  So because of his conservative nature, he doesn't want to invest more in stocks until the market comes down to 5200.  So even earnings estimates go down by about 7%, Ryan needs to see a drop of 14.75% before he feels comfortable and confident that he can get a reasonable return.

Photo by Austin Distel on Unsplash

Austin wants to be more aggressive.

Austin is also 30 years old, is a high earner, and has some additional cash that he would like to invest.  He has some concerns about the current market, but is more optimistic than Ryan.  While he also thinks that forecasted earnings will only be $260, he is still willing to pay $21.80 for every dollar in earnings (P/E ratio of 21.8), so he plans on investing more if the market pulls back to 5668 from 6100 (a decline of 7.08%).

Are you more like Ryan or Austin?

There is no "right" answer.  Math can tell you what you may "need" to do given certain conditions, but are those conditions actually right for you?  This is why the "soft stuff" matters; it helps you understand your investing style when the market gets tough - because it will.  In a world where we talk about love languages & attachment styles, it is just as important to understand what works for you and how you want to move forward - financially speaking, of course.  


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]]>Tue, 25 Mar 2025 17:38:24 -0500<![CDATA[A Lot Can Change in Two Months]]>https://www.omnidivitia.com/blogs/post/a-lot-can-change-in-two-monthsThe outlook for the markets & economy are quite different in August than they were in June.]]>

"It's The Economy, Stupid!"

The last two months have been a roller coaster, to put it mildly. 

  • 6/27 = Biden/Trump Presidential debate
  • 6/30 = S&P 500 ends 1H24 up just shy of 15%.
  • 7/13 = Assassination attempt of former President Trump
  • 7/19 = Crowdstrike cybersecurity crash 
  • 7/21 = Biden pulls out of the Presidential race
  • 7/24 = Kamala Harris becomes the Democratic nominee
  • 7/26 = Paris Olympics begin
  • 8/4 = S&P 500 drops over 6% since the beginning of July
  • 8/11 = Paris Olympics end
  • 8/21 = S&P 500 recovers, gaining about 8% from the 8/4 low, now up just under 17% YTD.
  • 8/23 = Federal Chairman Jerome Powell indicates that rate cuts are on the way.

Despite everything that has occurred, the remainder of the year will still be focused on... (you guessed it)... the economy.

Economy & Markets

Through 6/30/24, the Russell 1000 index, which covers large-cap stocks, was up 14.24%.  Since then, after rising a little further, it dropped approximately 8%, and then recovered to be up about 18.33% as of 8/23/24..  The Federal Reserve's focus has shifted from the fight against inflation to supporting the labor market as recent data points toward a slowdown.  In fact, the Bureau of Labor Statistics recently revised employment downward by 818,000 as of March, possibly meaning that the economy may not be as strong as figures have appeared in recent months.


In August 2022 at Jackson Hole, Fed Chairman Powell famously said "While higher interest rates, slower growth and softer labor market conditions will slow down inflation, they will also bring some pain to businesses and households."  Two years later, at the most recent Federal Reserve retreat, he stated "The time has come for policy to adjust.  The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balancing of risks.  We will do everything we can to support a strong labor market as we make further progress toward price stability.  ...there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market."  In other words - THE SOFT LANDING.


It's also clear that there is a market rotation away from the large growth stocks that have brought the market along to new highs.  However, overall valuations are still quite high, and there may be a desire for opportunities with more reasonable valuations, or with reduced risk, especially as interest rate cuts may be ahead.

Political Noise through Year End

Joe Biden's decision to drop out of this year's Presidential Election sent a shock wave  throughout the United States.  Recent polls, even with the revised matchup, show that the election will likely be quite close.  Polls by ABC News/FiveThirtyEight.com show the Biden/Trump pairing to be in Trump's favor 43.5% vs 40.2% as of July 21st.  However, as of August 25th, the ticket of Vice President Kamala Harris & Gov. Tim Walz now leads the former President Donald Trump/Senator J.D. Vance ticket by more than 3% (47.2% vs 43.7%).


The political discourse is likely to be loud through the year end.  However, the saying "It's the economy, stupid!" will likely dominate the conversation as November 5th approaches. Candidates' fiscal plans will certainly be scrutinized by both individual voters and the business community, especially with the background of a slowing economic backdrop.


]]>Mon, 26 Aug 2024 06:00:00 -0500<![CDATA[The Stubborn Soft Landing]]>https://www.omnidivitia.com/blogs/post/the-stubborn-soft-landingAre we actually on track for a "soft landing"?]]>

The Battle Against Inflation is Not Over

The S&P 500 is up just roughly 25% since late October, and the other benchmarks have also continued their momentum. The improvement in forward earnings estimates would appear to justify the growth. Other styles have also performed well. The underlying sentiment seems to be that a soft landing was likely, and the Fed would cut rates numerous times this year to keep the economy from slowing too much.


However, hopes for rates cuts by the Federal Reserve have been premature as the fight against inflation continues. The Consumer Price index not only remains above 3%, but it also ticked upwards slightly in February. Even the Personal Consumption Expenditures Index, the Federal Reserve's preferred measurement of inflation, was up over 2.5% from February 2023 (2.8% excluding food and energy). With inflation being so stubborn, and remaining above their long-term goal, it is likely that "higher for longer" will be the case (i.e., a higher interest rate environment will last for longer than people previously thought).  

This excerpt from a recent Federal Open Market Committee (FOMC) report, known as the "Dot Plot", reflects how views on the economy have changed. While some market analysts have anticipated as many as seven rate cuts in 2024, this shows that the FOMC members anticipate that there will likely only be three cuts in 2024, leading to a Fed Funds rate ranging from 4.50% to 4.75%, from the current range of 5.25%-5.50%.

This would also explain the recent bond market performance, since a lack of anticipated rate cuts would lead to investors searching elsewhere for more attractive return prospects.

A "soft landing" is - unofficially - when monetary policymakers both slow the pace of economic growth and reduce inflation without causing a recession. So far, that appears to be the most likely scenario. I think even a mild recession, or a "soft-ish" landing, could be understandable at this point. One factor I have been monitoring has been the unemployment rate, which is beginning to rise slightly despite being at near historic lows.

Unemployment was measured at 3.9% as of February 2024, the most recent reading as of publication. If actions by policymakers cause consumer demand to slow too much, companies may begin to slow production &/or reduce headcount as an attempt to maintain progress toward their financial goals. This could lead to an increase in unemployment, causing consumers to spend less, and continuing the cycle. 


2023 was all about AI-related stock "FOMO" (fear of missing out), resulting in a few stocks with outsized gains & dragging the market along with it. I believe 2024 will be all about the FOMC's focus on managing inflation. If inflation remains stubbornly above the long-term goal of 2%, interest rates will be "higher for longer" and will dominate the conversation all year (up to & possibly during the election).

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]]>Fri, 05 Apr 2024 13:34:38 -0500<![CDATA[Ending with a Bang!]]>https://www.omnidivitia.com/blogs/post/ending-with-a-bang

2023 was all about the "Magnificent Seven" stocks.  What does 2024 hold?

Markets in 4Q23 ended with basically an entire year's worth of returns in a decent year.  Large cap stocks were up over 26%, small caps were up almost 17%, and international developed markets were up nearly 19%.  Both fixed income and cash equivalents (as measured by the 90 day US T-Bill) were up more than 5%.  But let's delve into the details a little further.  Will we  have more of the same in 2024?

2023 Magnificent 7 stock charts

"Magnificent 7" Stocks Skew Market Returns

Last year was all about the "Magnificent 7 stocks" (AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA) which are perceived to be best positioned to benefit the most from the A.I. trend.  The markets have become distorted due to the outsized, over-weighted performance of these companies. This chart is the S&P 500 along with the Magnificent 7 stocks. Note how the 26.29% return of the S&P 500 (the bottom line) is dwarfed by the other returns. For comparison, if we equally weighted all companies in the benchmark, the return would have been just under 12%.  These seven companies have represented 25-30% of the total stock market value, and had an average return of 108% in 2023.  This means that the remaining 493 stocks, representing 70-75% of the index value, provided basically NO return in 2023. 

Interest Rates are actually Returning to "Normal"

It is also important to remember where interest rates have been historically for context. This chart shows the Fed Funds Effective Rate going back to 1955. While there was a spike in the 1980s due to an energy crisis, it could be construed that we are presently in a normal range. Most of the last 20 years, we have had an exceptionally accommodative rate environment because of three "once in a lifetime" type of events: the tech bubble; the Great Financial Crisis; and COVID-19. The current environment is normal historically, but there is an entire generation of investors for which this is a shock.

Investors should also remember that any interest rate cuts would be due to a slowdown in economic activity (prompted by the lagging impact of interest rate increases), not just where headline inflation lands. We still have a long way to go. The chart also shows how many cutting cycles have been in or followed by a recession, which is one of the reasons why 1H24 could have a slowdown, whether defined as a "soft landing" or later officially defined as a recession.

Conclusion

Fear of missing out on the AI craze drove the equity markets in 2023, although several measures indicate that valuations may be too high at this point. Similarly, consumers continue to drive this economy, although household balance sheets have slightly deteriorated due to higher debt spending. Many experts believe that the first half of 2024 will be affected by both of these trends before resuming a more normal course of behavior.

Prudence will be necessary, and, as I have stated previously, having patience is hardest when it is needed the most. 2024 may have some noise to it, and bumps along the way, but I believe we will be even better as we navigate our way through.

If you have questions about how to navigate these risks, click the button below to discuss your situation more in depth.
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]]>Thu, 11 Jan 2024 19:11:24 -0600<![CDATA[Fundamentals vs. the Fed]]>https://www.omnidivitia.com/blogs/post/fundamentals-vs-the-fedEarnings may be a sign of where markets are heading.]]>

Earnings May Start to Get More Attention

Our focus has been on the Federal Reserve's tightening cycle for some time, and on COVID stimulus prior to that.  A fundamental aspect of investing has gotten lost in the meantime, but it may start to get more attention in the near future - EARNINGS.  At a base level, when we invest in stocks we become equity owners of that company.  Owners want their companies to make money, both as top line revenue, and more importantly, as bottom-line earnings.  It seems that we have lost sight of how important earnings are, especially regarding fundamental valuations.

S&P 500 Forward Earnings Estimates Have Begun to Turn Over

Fed rate increases take time to work through the economy to have an impact.  The first post-COVID increase occurred in March 2022 at 0.25%.  However, S&P 500 forward earnings per share (EPS) estimates did not peak until June, and began to decline in July. I believe that the decline in estimates still has a way to go.  If that turns out to be the case, and if P/E ratios approach historical norms, it could be a bumpy ride for a while. 


This would be a classic example of one of Bob Farrell's Rules of Investing, as I've quoted in previous posts: "Bear markets have three stages - sharp decline, reflexive rebound, and a drawn out fundamental downtrend.

With an increased focus on fundamentals, higher rates, and considering the Fed is still taking money out of circulation, a continued market pullback is certainly possible in 2023.  However, the Fed also understands the tightrope they are walking: slowing down the economy just enough to tame inflation compared to pushing it into recession.  Asset depreciation may be a casualty of their efforts, but only time will tell.

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