Chris Turner has a guest post at Doug Short’s Advisor Perspectives called When Warren Buffett Talks … People Listen examining Warren Buffett’s favored market valuation metric: Market Value divided by Gross National Product. (I’ve also examined market value-to-GNP several times. See Warren Buffett and John Hussman On The Stock Market, FRED on Buffett’s favored market measure: Total Market Value-to-GNP, The Physics Of Investing In Expensive Markets: How to Apply Simple Statistical Models)
Here Chris looks at the metric using the CPI deflator on both the numerator — market value — and the denominator — Gross National Product.
Here Chris calculates two fair values for the S&P 500. The blue line shows the historical mean and the green line shows Buffett’s 80 percent value estimate:
Readers can see from the chart that based on both Buffett’s rule and the historical mean, the S&P would be trading much lower from present levels. The S&P would be sub 1000 based on the historical mean and around 1150 based on the 80% Buffett rule.