The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

In this May 6, 2013 photo, Warren Buffett smiles during a television interview in Omaha, Neb. The annual charity auction of a private lunch with the billionaire investor has drawn bids of more than $2-million (U.S.) in each of the past five years, and last year it fetched a record $3,456,789.
In this May 6, 2013 photo, Warren Buffett smiles during a television interview in Omaha, Neb. The annual charity auction of a private lunch with the billionaire investor has drawn bids of more than $2-million (U.S.) in each of the past five years, and last year it fetched a record $3,456,789.
(NATI HARNIK/AP)

Buffett’s favourite indicator predicts five years of low returns

No wonder Warren Buffett’s having trouble finding attractive investment opportunities. His favourite measure of stock market value suggests mediocre returns for the S&P 500 for the next five years.

Mr. Buffett’s preferred measure of broad stock market valuations is U.S. market capitalization as a percentage of gross domestic product. The scatter chart below uses 23 years of quarterly data (as much as I have access) to compare the ratio of S&P 500 market cap to GDP against the average annual return for the ensuing five years.